fiscal year 2006 comprehensive annual financial report...for the teachers’ retirement system of...
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DILIGENCE
DILIGENTLY PURSUING EXCELLENCEComprehensive Annual Financial ReportFor the Fiscal Year ended June 30, 2006
Teachers’ Retirement System of the State of Illinoisa component unit of the State of Illinois
Statement of PurposeRetirement Security for Illinois Educators
Mission StatementDeliver superior service through skilled staff, innovative technology, and careful investment.
Fiscal Year Highlights 2006 2005Active contributing members 159,272 155,850Inactive noncontributing members 81,218 87,328Benefit recipients 85,103 82,575 Total membership 325,593 325,753
Actuarial accrued liability (AAL) $58,996,913,000 $56,075,029,000Less net assets held in trust for pension benefits 36,584,889,000 34,085,218,000 Unfunded actuarial accrued liability (UAAL) $22,412,024,000 $21,989,811,000
Funded ratio 62.0% 60.8%(actuarial value of assets/AAL)
Total fund investment return, net of fees 11.8% 10.8%
ExpensesBenefits paid $2,877,230,697 $2,533,102,848Refunds paid 57,967,063 59,395,758Administrative Expenses 15,303,370 14,403,715 Total $2,950,501,130 $2,606,902,321
IncomeMember contributions* $799,034,336 $761,790,009Employer contributions 123,542,608 148,813,036State of Illinois contributions 534,305,256 906,749,310Total investment income 3,993,289,880 3,330,039,158 Total $5,450,172,080 $5,147,391,513
* Includes member payments and accounts receivable under the Payroll Deduction Program.
PhotosCover: 101 South Second Street, San Francisco, CaliforniaFacing page: Olympic Block, Seattle, Washington
Buildings pictured in this report are part of the TRS investment portfolio. Some are wholly owned, while others are owned by a real estate fund in which TRS is a major investor.
Teachers’ Retirement System of the State of Illinoisa component unit of the State of Illinois
2815 West Washington Street, P.O. Box 19253Springfield, Illinois 62794-9253
trs.illinois.gov
COMPREHENSIVE ANNUAL FINANCIAL REPORT fOr the fIScal Year ended June 30, 2006
DILIGENCE
cOntentSPage 2
contentsIntroduction
6 CertificateofAchievement7 LetterofTransmittal
10 AMessagefromtheExecutiveDirector12 BoardofTrustees13 OrganizationalStructure14 ConsultingandProfessionalServices
Financial18 IndependentAuditors’Report20 Management’sDiscussionandAnalysis26 BasicFinancialStatements26 StatementsofPlanNetAssets27 StatementsofChangesinPlanNetAssets28 NotestoFinancialStatements49 RequiredSupplementaryInformation49 ScheduleofFundingProgress49 ScheduleofContributionsfromEmployersandOtherContributingEntities50 NotestoRequiredSupplementaryInformation51 OtherSupplementaryInformation51 ScheduleofAdministrativeExpenses51 ScheduleofInvestmentExpense51 ScheduleofPaymentstoConsultants
Investments54 Introduction55 SummaryData55 FundPerformancevs.BenchmarksandMarketValues56 PerformanceSummary57 AssetAllocationvs.Targets58 StrategicInvestmentListingAllocationTargetsvs.TotalAssets58 PortfolioSecuritiesSummary60 SecuritiesHoldings(Historical)60 SecuritiesHoldingsforYearsEndingJune3060 Growthof$10,00061 U.S.Equity64 InternationalEquity
cOntentSPage 3
67 GlobalFixedIncome 70 PrivateEquity 73 RealEstate 75 BrokerageActivity 76 Top50BrokersUsedbyTRSManagers 77 ExternalManagerFeePayments 77 ScheduleofInvestmentManagerFees 79 SecuritiesLending
79 SecuritiesLendingSummary
Actuarial 82 Actuary’sCertification 84 ActuarialAssumptionsandMethods 86 AnnualActuarialValuation 86 ActuarialValuationwithMarketValueAssets 86 AnalysisofFinancialExperience:ReconciliationofUnfundedLiability 87 ReconciliationofUnfundedLiability 88 StateFunding 88 StateFundingAmounts 89 TestsofFinancialCondition 89 FundedRatioTest 89 UnfundedLiabilityasaPercentageofPayrollTest 90 SolvencyTest 90 OtherInformation 91 RetireesandBeneficiariesAddedtoandRemovedfromRolls 92 AverageAnnualSalaryforActiveMembersbyYearsofService 94 ActiveMembersbyAgeandYearsofService 96 PlanSummary
Statistical102 ChangesinNetAssets,Last10FiscalYears102 BenefitandRefundDeductionsfromNetAssetsbyType,Last10FiscalYears105 EmployeeandEmployerContributionRates,Last10FiscalYears106 DemographicsofBenefitRecipientsandActiveMembersasofJune30,2006106 BenefitRecipientsbyTypeasofJune30,2006108 AverageBenefitPayments,Last10FiscalYears
110 PrincipalParticipatingEmployers
ith diligence. hat we hope ver to do with ase we may irst learn to with diligence. hat we hope to o with ease we may hope
Whatwehopeevertodowitheasewemaylearnfirst
todowithdiligence.~SamuelJohnson
1709-1784
three fIrSt natIOnalchIcagO, IllInOIS
INTRODUCTION
ful introduc-tion eat-er e ses. Dilig the emp ent of le se-que the most success-ful introduc-
IntrOductIOnPage 7
letter of transmittalDecember15,2006
IampleasedtopresenttheComprehensive Annual Financial ReportfortheTeachers’RetirementSystemoftheStateofIllinois(TRS)forthefiscalyearendedJune30,2006.TRSmanagementandstaffareresponsiblefortheaccuracyandcompletenessofthisreportandforensuringthatall material disclosures have been made.To the best of our knowledge, the information pre-sentedisafairandaccurateportrayalofthefinancialpositionandoperationsofTRSasofJune30,2006.
TRSwasestablishedbytheStateofIllinoisonJuly1,1939,toprovideretirement,disability,anddeathbenefitstoteachersatIllinoispublicelementaryandsecondaryschoolsoutsidethecityofChicago.
Thisreportconsistsoffivesections:
• TheIntroductionSectioncontainstheCertificateofAchievementforExcellenceinFinancialReporting,thisLetterofTransmittal,amessagefromourexecutivedirector,identificationoftheTRSBoardofTrusteesandorganizationalstructure,andconsultingandprofessionalserviceproviders.
• TheFinancialSectioncontainstheIndependentAuditors’Report,Management’sDiscus-sionandAnalysis,thebasicfinancialstatementsandrelatednotes,requiredsupplementaryschedules,andothersupplementaryinformation.
• TheInvestmentSectioncontainsinformationdetailingTRSperformance,investmentman-agers,andtheTRSinvestmentportfolio.
• TheActuarial Section contains the actuary’s letter of certification, actuarial assumptionsandmethods,thelatestactuarialvaluationresults,certainstatisticalinformationonactivemembersandbenefitrecipients,andaplansummaryincludinganychangesintheplan.
• TheStatisticalSectioncontainsinformationandadditionalstatisticaldatapertainingtoplanparticipantsandhistoricaldataonrevenueandexpenses.
FinancialInformationAsystemofinternalcontrolshelpsTRStomonitorandsafeguardassetsandpromoteefficientoperations.AnannualexternalauditisconductedbytheIllinoisAuditorGeneralinadditiontoregularreviewsbyourinternalauditor.TheannualbudgetforTRSadministrativeexpensesisapprovedbytheBoardofTrustees,andfinancialstatementsarepreparedinaccordancewithgenerally accepted accounting principles (GAAP) within the guidelines established by theGovernmentalAccountingStandardsBoard(GASB).
Teachers’ Retirement System of the State of IllinoisJon Bauman, Executive Director
2815 West Washington, P.O. Box 19253Springfield, Illinois 62794-9253
Retirement Security for Illinois Educators
IntrOductIOnPage 8
PleaserefertotheManagement’sDiscussionandAnalysisforanoverviewofthefinancialhigh-lightsandafinancialanalysisofTRS.MajorTRSinitiativesandaccomplishmentsarecontainedintheexecutivedirector’smessage.
RevenuesandExpensesThe three sources forTRS funding include member contributions, investment income, andemployer contributions through state appropriations and payments by school districts.TRSexpensesincludepaymentsofbenefits,refunds,andadministrativeexpenses.Negativeamountsareenclosedinparentheses()throughoutthisreport.
revenues ($ millions) Increase/(decrease)Source 2006 2005 amount % changeMembercontributions $799 $762 $37 4.9%StateofIllinois 534 907 (373) (41.1)Employercontributions 124 148 (24) (16.2)Totalinvestmentincome 3,993 3,330 663 19.9 total $5,450 $5,147 $303 5.9%
expenses ($ millions) Increase/(decrease)Source 2006 2005 amount % changeBenefitspayments $2,877 $2,533 $344 13.6%Refunds 58 60 (2) (3.3)Administrative/Other 15 14 1 7.1 total $2,950 $2,607 $343 13.2%
InvestmentsTRSinvestmentshadan11.8percentreturnnetoffeesfortheyear.TotalinvestmentincomeforFY06was$3,993million.TheTRStrustfundisinvestedbyauthorityoftheIllinoisPensionCodeundertheprudentpersonrulethatrequiresinvestmentstobemanagedsolelyintheinterestofTRSmembersandbeneficiaries.Theportfolioisfullydiversifiedacrossdifferentassetclasses.Withineachassetclassthereareanumberofinvestmentmanagerstoensuretheappropriatemixtureacrossthevariousinvestmentstyles,allowingtheportfoliotoachievebroadexposuretothemarket,whileminimizingrisk.Thisbroaddiversificationservesasthebestdefenseagainsttheuncertaintyofvolatileworldmarkets.
The Investment Section of this report contains a summary of the portfolio and investmentactivities.
FundingTheactuarialvalueofassets(netassetsatmarketvalue)was$36.585billionat June30,2006.Net assets increased $2.500billion.TRS’s actuarial accrued liability was $58.997billion atJune30,2006,resultinginafundedratioof62.0percent.Thisfundedratioisanincreasefromthe funding ratio of 60.8percent for FY05. Despite significant actuarial gains due to FY06investment returns,TRS’s actuarial unfunded liability increased $0.422billion during FY06to$22.412billionatJune30,2006.Theincreaseintheunfundedliabilityismainlyduetotwofactors:statecontributionsweretoolowtocoverthecostofbenefitsearnedbyactivemembersduring the year, and no state contributions were made toward reducing or stabilizingTRS’slongstandingunfundedliability.
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TheActuarialSectionof this report contains theactuary’s letterand further informationonTRSfunding.
IndependentAuditEachyearTRS’s financial statements, records, and internal controls are examinedby specialassistantauditorsemployedbytheIllinoisAuditorGeneral.Inaddition,anannualcomplianceattestationexaminationisperformedtoreviewcompliancewithapplicablestatutesandcodes.TheIndependentAuditors’ReportonTRS’sfinancialstatementsisincludedintheFinancialSectionofthisreport.
GFOAAwardTheGovernmentFinanceOfficersAssociationoftheUnitedStatesandCanada(GFOA)awardedaCertificateofAchievementforExcellenceinFinancialReportingtoTRSforitsComprehensive Annual Financial Report forthefiscalyearendedJune30,2005.TheCertificateofAchievementisaprestigiousnationalawardrecognizingexcellenceinthepreparationofstateandlocalgovern-mentfinancialreports.
Tobeawardedthecertificate,agovernmentunitmustpublishaneasilyreadableandefficientlyorganizedcomprehensiveannualfinancialreportwhosecontentsmeetorexceedprogramstan-dards.Thisreportmustsatisfybothgenerallyacceptedaccountingprinciplesandapplicablelegalrequirements.ACertificateofAchievementisvalidforaperiodofoneyearonly.TRShasreceivedacertificateforthelast17years.WebelieveourcurrentreportcontinuestomeettheprogramrequirementsandaresubmittingittotheGFOAforconsiderationagainthisyear.
AcknowledgmentsInformationforthisreportwasgatheredbyandreflectsthecombinedeffortsofTRSstaffunderthe leadership of the Board ofTrustees and the executive director. It is intended to providecompleteandreliableinformationasabasisformakingmanagementdecisions,todetermineourcompliancewithlegalprovisions,andasameansfordeterminingresponsiblestewardshipoftheassetscontributedbymembersandtheiremployers.
ThisreportisprovidedtomembersoftheGeneralAssembly,allparticipatingemployers,andtoothersbyrequest.TheparticipatingemployersofTRSformalinkbetweenTRSanditsmembers.Theircooperation,forwhichwearegrateful,contributessignificantlytooursuccess.Wehopethisreportisbothinformativeandhelpful.
JanaBergschneiderDirectorofAdministration
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a Message from the executive directorPrefer diligence before idleness
unless you esteem rust over brilliance~ Plato
427-247 BC
December15,2006
DearFriends:
Asstewardsofyourretirementtrustfund,TRSfollowsaconsistent“duediligence”investmentapproachtoassurethatallcontingenciesareconsideredandalldecisionsaremadewithprudenceandwisdom.Diligenceisapartofourculture.Diligenceleadstosuperiorresultsinourinvest-ments,butequallyimportant,inourservicetomembers.
Iamprivilegedtoshareanoptimisticmessagewithyou.TRSmembersreportedhighsatisfac-tionwithourservice,investmentreturnscontinuedtorankinthetop25percentoflargepublicplans,andwecontinuedtoholdadministrativecostsbelowotherIllinoisstate-fundedsystems.Outstandinginvestmentreturnsenabledinanincreaseinourfundedratio,eventhoughtheStateofIllinoisreduceditscontributionsby$524millioninanefforttobalancethestatebudget.Weworkhardandwestriveforthebest,makingaptourannualreporttheme,“DiligentlyPursuingExcellence.”TheimpressivebuildingsthatillustratethisreportarepartofTRS’srealestateport-folio.Ihopeyouenjoyseeingtangibleexamplesofourstewardshipofyourretirementfunds.
PursuingtheBestEachTimeWeMeetWhethermeetingmembersintheoffice,bytelephone,oratoneofourmanyfieldmeetings,ourmemberservicespersonnelseektoprovidethebestservicepossible.Over96percentofmembersreturningresponsecardsratedourservice“highlysatisfactory.”Anewtelephonesystemhashelpedreducetheaveragewaittimeforamemberservicerepresentativetolessthanoneminute.TRSusestheverybesttechnologythatallowsustoretainourcommitmenttopersonalservice.Althoughimplementationchallengedourstaff,improvedserviceandoptionsforfutureimprovementsmadetheeffortworthwhile.Ourcommitmenttoserviceextendstotheemployercommunity,whowereservedby14regionalseminarsand38individualmeetings.
AchievingInvestmentExcellenceAsinsevenofthepast10years,TRSinvestmentsrecordeddoubledigitreturns.Thetotalreturnafterallexpenseswas11.8percentinFY06,comparedto10.8percentinFY05.ThisconsistentperformanceonceagainplacedTRSinthetopquartileoflargepublicfundsintheWilshireTrustUniverseComparisonService(TUCS).Thisimpressiverecordunderscoresthewisdomofourdiversifiedinvestmentapproach.Noteworthyaccomplishmentsinclude:
• Fundassetswere$36.6billion,a7.3percentincreaseandanall-timehigh.
• Asinfiveofthelastsixyears,TRSwasthebestperformingIllinoisstatepensionfund.
• Internationalequityproducedanimpressive27.3percentone-yearreturn.
• Privateequityprovidedaone-yearreturninexcessof20percentforthesecondconsecutiveyear.The10-yearreturnis19.5percent.
• TRSsecureda$13millionsettlementforlossesarisingfromtheWorldCombankruptcy.
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SecuringLegislativeAccomplishmentsTwolegislativemeasuresillustrateourdiligenceinsecuringneededlegislationandassistingtheGeneralAssemblyinitswork.TRSworkedproductivelytoextendthe120-daypost-retirementemploymentlimitation.OurassistanceroleculminatedintheenactmentofPublicAct94-1057,whichexemptscertaintypesofsalaryadjustmentsfromtherequirementthatemployerspaytheadditionalpensioncostofsalaryincreasesinexcessof6percent.
Lastyear’spassageofPublicAct94-0004,whichextendedandmodifiedtheEarlyRetirementOption(ERO)andestablishednewlimitationsonandcontributionsforcertainsickleaveandend-of-careersalaryadjustments,presentednumerouschallenges.TRSsoughtandachievednear-perfectconsensuswithallaffectedpartiesonrulestoimplementthelegislation.Otherchallengesincludedadaptingourinformationsystemsandprovidingup-to-theminuteinformationtoourmembersandtheiremployers.
TheTRSlegalstafftookakeyroleinnegotiatingarulemakingtoimplementrecentlyenactedchangesintheQILDROlaw.Thelawgovernsthedivisionofpublicpensionbenefitsincasesofmaritaldissolution.
FacingChallengesAsinlife,TRSfacedchallengesanddisappointments.RecenteventsinvolvingaformertrusteeandaformeroutsidecounselwhobreachedthehighstandardweexpectofthosewhoserveTRSleftusangeredanddisheartened.Asacredtrustwasbetrayed.Whiletheextensivemediacover-agemakesanextendeddiscussionunnecessary,Iwanttoreassureyouofthreeimportantpoints.First,atnotimewereanyTRSassetsusedtofundillegalpaymentsallegedlysoughtfromcurrentandpotentialTRSinvestmentmanagers.NotonepennyofTRSmoneywaseverlostorputatriskbythisscheme.Second,TRShasactivelycooperatedintheinvestigation,providinginforma-tion,documents,andtestimony.Finally,ourinvestmentprocessandthefundamentalhonestyofourstaff,ourcurrentBoardofTrustees,andtheprofessionalinvestmentcommunityproactivelydiscouragesanddiscoverssuchunethicalbehavior.
AtTRS,weneverconsiderourmissionaccomplishedorourtaskcompleted.Rather,weworkwithdiligencetobetterourrecordandimproveourservice.
Sincerely,
JonBaumanExecutiveDirector
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Board of trusteesAsofDecember1,2006
James Bruner Jacksonville
Jack carriglio Glenview
Jan cleveland Carmi
cinda Klickna Rochester
Sharon leggett Evanston
Bob lyons HoffmanEstates
cynthia O’neill Carlyle
christopher a. Koch, ed.d.InterimPresident
Bloomington
Molly Phalen,VicePresident
Rockford
William Orrill Carbondale
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Organizational StructureExecutiveStaffMembersasofDecember1,2006
Kathleen farney DirectorofResearch
Jon Bauman ExecutiveDirector
Stacy Smith, cPa InternalAudits
Manager
tom gray GeneralCounsel
eva goltermann PublicInformation
Officer
Stan rupnik, cfa ChiefInvestment
Officer
Kathy Pearce Communications
Supervisor
gina larkin Directorof
HumanResources
terry Viar Directorof
MemberServices
Board of trustees
andrew Bodewes Directorof
GovernmentAffairs
Jana Bergschneider, cPa Directorof
Administration
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consulting and Professional ServicesActuaryBuckConsultants,anACSCompanyChicago, Illinois
ExternalAuditors(As special assistants to the Office of the Auditor General)BKD,LLPDecatur, Illinois
InformationSystemsCanaudit,Inc. HuppInformationTechnologiesSimi Valley, California Springfield, IllinoisIBMCorp. Pro-TechSearch,Inc.Chicago, Illinois/Boulder, Colorado Petersburg, IllinoisSBCDatacomm SentinelTechnologiesSaginaw, Michigan Chicago, IllinoisVeriSign,Inc.Toronto, Ontario
InvestmentConsultants(Investment management firms are listed throughout the Investment Section.)CallanAssociatesInc. RiskResources(realestateconsultant) (realestateinsurance) San Francisco, California Elmhurst, IllinoisR.V.Kuhns&Associates,Inc.(generalconsultant)Portland, Oregon
ExternalLegalCounselBarnes&ThornburgLLP CalhounLawGroup,P.C.Chicago, Illinois Washington, D.C.Cavanagh&O’Hara Foley&LardnerLLPSpringfield, Illinois Chicago, IllinoisHeyl,Royster,Voelker&Allen Holland&KnightLLPSpringfield, Illinois Chicago, IllinoisHoward&HowardAttorneysPC Jenner&BlockLLPPeoria, Illinois Chicago, IllinoisLerachCoughlinStoia Loewenstein,Hagen&Smith,P.C.GellerRudman&RobbinsLLP Springfield, IllinoisSan Diego, California
MasterTrusteeTheNorthernTrustCompanyChicago, Illinois
mountains. Pa-ence and dili-
gence, like faith, emove moun-ains. Patience
and diligence, ke faith, re-
move moun-ains Patience
Patienceanddiligence,likefaith,remove
mountains.~WilliamPenn
1644-1718
600 leXIngtOnneW YOrK, neW YOrK
F I N A N C I A L
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Management’s discussion and analysisOurdiscussionandanalysisoftheTeachers’RetirementSystemoftheStateofIllinoispro-videsanoverviewoffinancialactivitiesforthefiscalyearendedJune30,2006.PleasereaditinconjunctionwiththeLetterofTransmittalintheIntroductionSectiononpage7andtheBasicFinancialStatementsandrelatednotesthatfollowthisdiscussion.
FinancialHighlights• TRSnetassetsatJune30,2006,were$36.6billion.
• DuringFY06,TRSnetassetsincreased$2.5billion.
• Contributions from members, employers, and the State of Illinois were$1,457million,adecreaseof$360millionor19.8percentforthefiscalyear.
• Totalinvestmentincomewas$3,993million,anincreaseof$663millioncomparedtoFY05.
• Benefitsandrefundspaidtomembersandannuitantswere$2,935million,anincreaseof$342millionor13.2percentcomparedtoFY05.
• Thepensionbenefitobligationortotalactuarialaccruedliabilitywas$59.00billionatJune30,2006.
• Theunfundedactuarialaccruedliabilityincreasedfrom$21.99billionatJune30,2005to $22.41billion at June30,2006.The funded ratio increased from 60.8percent atJune30,2005to62.0percentatJune30,2006.
The Basic Financial Statements contained in this section of the Comprehensive Annual Financial Report consistof:
Statements of Plan Net Assets.This statement reports the pension trust fund’s assets,liabilities,andresultantnetassetsavailabletopaybenefitsattheendofthefiscalyear.ItisthebalancesheetofTRSandreflectsthefinancialpositionoftheTeachers’RetirementSystemasofJune30,2006.
Statements of Changes in Plan Net Assets.Thisstatementdetailstransactionsthatoccurredduringthefiscalyear.ItistheincomestatementofTRSandreflectstherevenuesandexpensesrecordedthroughoutthefiscalyear.TheStatementsofChangesinPlanNetAssetssupportsthechangeinthevalueofthenetassetsreportedontheStatementsofPlanNetAssets.
Notes to the Financial Statements.Thenotesareanintegralpartofthefinancialstate-mentsandincludeadditionalinformationnotreadilyevidentinthestatementsthemselves.The required supplementary information and other schedules following the notes to thefinancialstatementsprovidehistoricalandadditionaldetailedinformationconsideredusefulinevaluatingthefinancialconditionoftheTeachers’RetirementSystem.ThefollowingarecondensedcomparativefinancialstatementsoftheTRSpensiontrustfund.
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condensed comparative Statement of Plan net assets as of June 30 Percentage Percentage 2006 change 2005 change 2004Cash $3,867,280 2.4% $3,777,107 (11.5%) $4,269,329
Receivablesandprepaidexpenses 352,050,422 (8.0) 382,518,911 8.1 353,725,714
Investments 37,336,880,818 7.0 34,898,361,784 8.9 32,046,373,325
Investedsecuritieslendingcollateral 4,401,016,409 0.3 4,386,594,663 26.6 3,466,114,601
Capitalassets 2,333,759 0.6 2,320,275 2.1 2,273,510
total assets 42,096,148,688 6.1 39,673,572,740 10.6 35,872,756,479
total liabilities 5,511,259,261 (1.4) 5,588,354,263 29.1 4,328,027,194
net assets $36,584,889,427 7.3% $34,085,218,477 8.1% $31,544,729,285
condensed comparative Statement of changes in Plan net assetsfor the Year ended June 30 Percentage Percentage 2006 change 2005 change 2004Contributions $1,456,882,200 (19.8%) $1,817,352,355 (71.0%) $6,258,086,538
Totalinvestmentincome 3,993,289,880 19.9 3,330,039,158 (25.8) 4,485,729,345
Totaladditions 5,450,172,080 5.9 5,147,391,513 (52.1) 10,743,815,883
Benefitsandrefunds 2,935,197,760 13.2 2,592,498,606 12.2 2,310,349,123
Administrativeexpenses 15,303,370 6.2 14,403,715 6.2 13,560,546
Totaldeductions 2,950,501,130 13.2 2,606,902,321 12.2 2,323,909,669
net increasein net assets 2,499,670,950 (1.6) 2,540,489,192 (69.8) 8,419,906,214
net assetsbeginning of year 34,085,218,477 8.1 31,544,729,285 36.4 23,124,823,071
net assetsend of year $36,584,889,427 7.3% $34,085,218,477 8.1% $31,544,729,285
FinancialAnalysisTRSwascreatedtoprovideretirement,survivor,anddisabilitybenefitstoqualifiedmembers.IncreasesordecreasesinplannetassetsserveasusefulindicatorsofTRS’sfinancialposition.Netassetsavailabletopaybenefitswere$36.6and$34.1billionatJune30,2006and2005,respectively.Netassetsincreased$2.5billionduringbothFY06andFY05.
ContributionsContributionsdecreased$360and$4,441millionduringFY06andFY05,respectively.DuringFY06, member contributions increased $37million and employer contributions from schooldistrictsdecreased$24million.DuringFY05,membercontributionsdecreased$7millionandemployercontributionsfromschooldistrictsincreased$20million.Themajorityofthedecrease
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intheemployercontributionsfromschooldistrictsinFY06isattributabletoareductioninthecontributionrateonfederally-fundedsalariesfrom10.5percentinFY05to7.06percentinFY06andadecreaseinemployerEarlyRetirementOptioncontributionsduetoalowernumberofmemberselectingtoretireundertheEarlyRetirementOption.
TheStateofIllinoismakesappropriationstoTRS.ReceiptsfromtheStateofIllinoisdecreased$373and$4,455millioninFY06andFY05,respectively.ThedecreaseinFY06occurredbecausePublicAct 94-0004 specified a lower appropriation that was not based on actuarial fundingrequirements.ThelargedecreaseinFY05isduetotheone-timereceiptofpensionobligationbondproceedsfromtheStateofIllinoisinFY04.OnJuly2,2003,TRSdeposited$4.330bil-lion in bond proceeds received from the State of Illinois.These funds represented a portionofthe$10billionofgeneralobligationbondsissuedbytheStateofIllinoisforthepurposeofreducingtheunfundedliabilitiesforTeachers’RetirementSystem,StateEmployees’RetirementSystem,StateUniversitiesRetirementSystem,GeneralAssemblyRetirementSystem,andJudges’RetirementSystem.
Statefundinglawprovidesfora50-yearfundingplanthatincludesa15-yearphase-inperiod.MinimumstatecontributionrateswerespecifiedinthestatuteforFY99throughFY04.InFY05,statecontributionswerereducedinaccordancewithfundingrevisionscontainedinthepensionobligationbondlaw.InFY06andFY07,statecontributionsarebasedondollaramountsspecifiedbyPublicAct94-0004.Thelegislationcontainedatwo-yearfundingreductionofapproximately50percentorover$1billionforTRS.Higherstatecontributionswillbeneededinfutureyearstomakeupforthetwo-yearfundingreduction,astheoverallgoalof90percentfundingintheyear2045isunchanged.
revenues by type for the Year ended June 30, 2006
State of Illinois9.8%
Members14.7%
InvestmentIncome73.2%
Employers2.3%
InvestmentsTheTRS trust fund is invested according to law under the“prudent person rule” requiringinvestmentstobemanagedsolelyintheinterestoffundparticipantsandbeneficiaries.Principles
-5%
0%
5%
10%
15%
20%
1997 1998 1999 20002001 2002
2003 2004
16.6%18.3%
10.8% 10.6%
(4.2%)(3.2%)
4.9%
16.5%
2005
10.8%
2006
11.8%
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guidingtheinvestmentoffundsincludepreservingthelong-termprincipalofthetrustfundandmaximizingtotalreturnwithinprudentriskparameters.
Totalinvestmentsincreased$2.4billionfrom$34.9billionatJune30,2005to$37.3billionatJune30,2006.
TheTRSinvestmentportfoliohadanotherstrongyear.TRSinvestmentsearnedan11.8and10.8percentrateofreturn,netoffees,forFY06andFY05,respectively,asallassetclassesagainproducedpositivereturns.Overall,theU.S.economyremainedvibrantandinflationrestrained,providingahealthyinvestmentenvironment.OutsideoftheU.S.,marketswereevenstrongerwithstockreturnsinthehigh20percentrangeledbycontinuedexpansionfromemergingmarketeconomies.SubstantialgainswereaccumulatedintheprivatemarketsinFY06withtheTRSprivateequityportfolio returning23.8percent,netof fees, and theTRSreal estateportfoliogeneratingan18.8percentreturn,netoffees.Thefive-and10-yearreturnsare7.9percentand9.0percent,respectively.Thelong-termreturncontinuestooutperformtheactuarialassumptionrateof8.5percent.
annual rate of return (net of investment expenses)
The annual rate of return is an indication of TRS investment performance and is provided by the TRS Master Trustee.
BenefitsandRefundsSurvivor,disability,andretirementbenefitpayments increased$344and$271millionduringFY06andFY05,respectively.DuringFY06,benefitpaymentsincreasedfrom$2,533millionwith82,575recipientsduringFY05to$2,877millionwith85,103recipients.Theoverallincreaseinbenefitpaymentsisduemainlytoanincreaseinretirementbenefitpayments.Retirementbenefitsincreasedasaresultofanautomatic3percentannualincreaseinretirementbenefitsandanincreaseinthenumberofretireesfrom73,464asofJune30,2005to75,747asofJune30,2006.
Refundsofcontributionsdecreased$2millionduringFY06andincreased$12millionduringFY05.Thedecreaseinrefundsisaresultofthedecreasein2.2upgradecontributionrefunds.
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expenses by type for the Year ended June 30, 2006
Survivor benefits3.8%
Administrativeexpenses
0.5%
Disability benefits0.8%
Retirementbenefits92.9%
Refunds2.0%
ActuarialTheannualactuarialvaluationmeasuresthetotal liabilityforallbenefitsearnedtodate.Theaccruedliabilityisapresentvalueestimateofallthebenefitsthathavebeenearnedtodate.Theactuarialaccruedliabilityincreased$2.92and$5.13billionduringFY06andFY05,respectively,to$59.00billionatJune30,2006and$56.08billionatJune30,2005.Theunfundedliabilityisthepresentvalueoffuturebenefitspayablethatarenotcoveredbyassetsasofthevaluationdate.Theunfundedliabilityincreased$0.42billionduringFY06to$22.41billionatJune30,2006andincreased$2.59billionduringFY05to$21.99billionatJune30,2005.Thefundedratioreflectsthepercentageoftheaccruedliabilitycoveredbynetassetsatmarketvalue.Thefundedratioincreasedto62.0percentatJune30,2006from60.8percentatJune30,2005.
TocomplywiththeIllinoisPensionCode,anactuarialexperienceanalysis isperformedonceeveryfiveyearstoreviewtheactuarialassumptions.Thelastexperienceanalysiswasconductedin2002.TRSactuariesarescheduledtoconductanexperienceanalysisforthefive-yearperiodendedJune30,2006in2007.
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funded ratio at Market Value
0%
10%
20%
30%
40%
50%
60%
70%
1997 1998 1999 2000 2001 2002 2003 2004
64.5%66.8% 67.0% 68.2%
59.5%
52.0%49.3%
61.9%
2005
60.8%
2006
62.0%
The funded ratio is the ratio of assets to liabilities. An increase in this ratio indicates an improvement in TRS’s ability to meet future benefit obligations.
LegislationGASB Statement Number 34 requires the Management Discussion andAnalysis to includeadescriptionofcurrentlyknownfactsexpectedtohaveasignificanteffectonTRS’sfinancialposition.
TheenactmentofPublicAct94-0004inJune2005continuestohavesignificantimpactonTRSbecause itdramatically reduced theFY06andFY07state contributions.The$523.9millionreductioninFY06isbeingfollowedbya$497.6millionreductioninFY07.StatecontributionswillbehigherinfutureyearstomakeupforthefundingreductioninFY06andFY07,astheoverallgoalof90percentfundinginyear2045isunchanged.
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Basic financial StatementsTeachers’RetirementSystemoftheStateofIllinoisStatementsofPlanNetAssetsasofJune30,2006,and2005 2006 2005assets
Cash $3,867,280 $3,777,107
receivables and prepaid expensesMemberpayrolldeduction 51,724,086 57,506,146Membercontributions 45,424,593 41,216,097Employercontributions 10,285,346 30,947,290StateofIllinois 194,093 441,044Investmentincome 243,067,231 249,963,566Prepaidexpenses 1,355,073 2,444,768
Totalreceivablesandprepaidexpenses 352,050,422 382,518,911
Investments, at fair valueFixedincome 10,537,985,786 10,325,741,083Equities 20,031,392,346 18,787,194,875Realestate 3,946,280,351 3,525,456,881Short-terminvestments 1,273,184,193 1,163,168,990Privateequityinvestments 1,513,997,646 1,068,633,225Foreigncurrency 34,040,496 28,166,730 Totalinvestments 37,336,880,818 34,898,361,784
Collateralfromsecuritieslending 4,401,016,409 4,386,594,663 Propertyandequipment,atcost,netofaccumulateddepreciationof$5,149,154and$5,235,129in2006and2005,respectively 2,333,759 2,320,275
total assets 42,096,148,688 39,673,572,740
liabilitiesBenefitsandrefundspayable 4,815,189 4,124,841Administrativeandinvestmentexpensespayable 125,120,198 118,607,225Payabletobrokersforunsettledtrades,net 980,307,465 1,079,027,534Securitieslendingtransactions 4,401,016,409 4,386,594,663
total liabilities 5,511,259,261 5,588,354,263
net assets held in trust for pension benefits $36,584,889,427 $34,085,218,477
(A schedule of funding progress is presented on page 49.)The accompanying notes are an integral part of these statements.
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Teachers’RetirementSystemoftheStateofIllinoisStatementsofChangesinPlanNetAssetsYearsEndedJune30,2006,and2005 2006 2005additions
contributionsMembers $799,034,336 $761,790,009StateofIllinois 534,305,256 906,749,310Employers Earlyretirement 53,897,973 65,378,955 Federalfunds 24,331,277 39,840,799 2.2benefitformula 45,162,802 43,593,282 Excesssalary/sickleave 150,556 0 Totalcontributions 1,456,882,200 1,817,352,355
Investment incomeFrominvestmentactivities Netappreciationinfairvalue 2,971,529,661 2,569,878,360 Interest 489,976,262 352,219,842 Realestateoperatingincome,net 270,388,389 222,603,171 Dividends 353,259,841 268,364,399 Privateequityincome 26,197,197 20,389,300 Otherinvestmentincome 1,870,744 1,931,616 Investmentactivityincome 4,113,222,094 3,435,386,688 Lessinvestmentexpense (132,196,285) (114,896,886) Netinvestmentactivityincome 3,981,025,809 3,320,489,802
Fromsecuritieslendingactivities Securitieslendingincome 199,749,533 88,385,077 Securitieslendingmanagementfees (2,162,259) (1,931,333) Securitieslendingborrowerrebates (185,323,203) (76,904,388) Netsecuritieslendingactivityincome 12,264,071 9,549,356 Totalinvestmentincome 3,993,289,880 3,330,039,158 total additions 5,450,172,080 5,147,391,513
deductionsRetirementbenefits 2,741,163,998 2,407,652,120Survivorbenefits 112,901,636 103,990,670Disabilitybenefits 23,165,063 21,460,058Refunds 57,967,063 59,395,758Administrativeexpenses 15,303,370 14,403,715 total deductions 2,950,501,130 2,606,902,321 net increase 2,499,670,950 2,540,489,192
net assets held in trust for pension benefitsBeginningofyear 34,085,218,477 31,544,729,285 end of year $36,584,889,427 $34,085,218,477
The accompanying notes are an integral part of these statements.
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NotestoFinancialStatementsa. Plan description1. reporting entityTheTeachers’RetirementSystemoftheStateofIllinois(TRS)istheadministratorofacost-shar-ingmultiple-employerdefinedbenefitpublicemployeeretirementsystem(PERS).Membershipismandatoryforallfull-time,part-time,andsubstitutepublicschoolpersonnelemployedoutsideofChicago inpositionsrequiringcertification.Personsemployedatcertainstateagenciesarealsomembers.EstablishedbytheStateofIllinois,TRSisgovernedbytheIllinoisPensionCode(40ILCS5/16).TRSisacomponentunitoftheStateofIllinoisandisincludedinthestate’sfinancialstatementsasapensiontrustfund.
TRSusescriteriaestablishedbytheGovernmentalAccountingStandardsBoard(GASB)todeterminewhetherotherentitiesshouldbeincludedwithinitsfinancialreportingentity.Basedonthecriteria,TRSincludesnootherentitiesinthesefinancialstatements.
2. employersMembersofTRSareemployedbyschooldistricts,specialdistricts,andcertainstateagencies.EachemployerremitsmembercontributionstoTRS.Employersareresponsibleforemployercontributionsforteacherspaidfromfederalfunds,employercontributionsformemberbenefitincreases,andfortheemployer’sportionoftheEarlyRetirementOptioncontributions.AsaresultofPublicAct94-0004,whichbecamelawonJune1,2005,employersarealsorequiredtopaythecostofpensionbenefitsresultingfromend-of-careersalaryincreasesover6percent.PublicAct94-1057,whichbecamelawonJuly31,2006,providesadditionalexemptionsfromemployer contributions for excess salary increases. Some of these exemptions are permanentwhileothersareavailableforalimitedtimeperiod.Employersalsopayacontributionforsickleavedaysgrantedinexcessofthemember’snormalannualallotmentandusedforservicecreditatretirement.Thecontributionsdonotapplytosalaryincreasesawardedorsickleavegrantedundercontractsorcollectivebargainingagreementsenteredinto,amended,orrenewedpriortoJune1,2005.Inaddition,theStateofIllinoisprovidesemployercontributions.ForinformationaboutemployercontributionsmadebytheStateofIllinois,see“Funding”onpage30.
NumberofEmployers(asofJune30) 2006 2005Localschooldistricts 871 878Specialdistricts 137 139Stateagencies 24 25 total 1,032 1,042
3. MembersTRSMembership(asofJune30) 2006 2005Retireesandbeneficiariesreceivingbenefits 85,103 82,575
Inactivemembersentitledtobutnotyetreceivingbenefits 81,218 87,328
Activemembers 159,272 155,850 total 325,593 325,753
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4. Benefit ProvisionsGovernedbytheIllinoisPensionCode(40ILCS5/16),whichissubjecttoamendmentbytheIllinoisGeneralAssemblyandapprovalbytheGovernor,TRSprovidesretirement,death,anddisabilitybenefits.Amemberqualifiesforanageretirementannuityaftermeetingoneofthefollowingrequirements:age62withfiveyearsofservicecredit;age60with10years;orage55with20years.Ifamemberretiresbetweentheagesof55and60withfewerthan35yearsofser-vice,theannuitywillbereducedattherateof0.50percentforeachmonththememberisunderage60.Amemberwhoisage55andhasfewerthan35yearsofservicecreditmayusetheEarlyRetirementOption(ERO)toavoidadiscountforearlyretirementifretirementoccurswithinsixmonthsofthelastdayofservicerequiringcontributions,andifthememberandemployerbothmakeaone-timecontributiontoTRS.
PublicAct94-0004,effectiveJune1,2005,madeseveralimportantchangestotheEROthatwasscheduledtoexpireonJune30,2005.TheEROprogramwillcontinueatleastthrough2012.Membersareconsideredtobeinthe“pipeline”toretireunderEROwithoutmodificationsiftheyhavemetallofthefollowingrequirements:
• OnorbeforeJune1,2005,membersnotifiedtheiremployerinwritingoftheirintentiontoretireunderthetermsoftheircontractorcollectivebargainingagreement.
• MembershaveaneffectivedateofretirementonorbeforeJuly1,2007.
ForthisPipelineEROgrouponly,memberandemployercontributionsarewaivedformemberswith34yearsofservice.
AModifiedEROisprovidedforallothermembers.EROcontributionratesarehigherforthemodifiedEarlyRetirementOptionandthecontributionwaiverformemberswith34yearsofserviceiseliminated.Membersandemployersmakeacontributionforanymemberundertheageof60whoretireswithlessthan35yearsofservice.
AmemberwithfewerthanfiveyearsofcreditableserviceandserviceonorafterJuly1,1947,isentitledtoasingle-sumbenefitpayableonceheorshereachesage65.
Aretirementbenefitisdeterminedbytheaveragesalaryofthefourhighestconsecutivesalaryrateswithinthelast10yearsofcreditableserviceandthepercentageofaveragesalarytowhichthememberisentitled.ThispercentageisdeterminedbythefollowingformulaforserviceearnedbeforeJuly1,1998:1.67percentforeachofthefirst10years,plus1.9percentforeachofthenext10years,plus2.1percentforeachofthenext10years,plus2.3percentforeachyearover30years.Themaximumretirementbenefit,75percentofaveragesalary,isachievedwith38yearsofserviceunderthegraduatedformula.
PublicAct90-0582 improved retirement benefits forTRS members by changing the rate atwhichmembersaccruebenefitsbeginningJuly1,1998,fromagraduatedratetoaflatrateequalto2.2percentoffinalaveragesalary.Membersmayattainthemaximum75percentbenefitwith34yearsofserviceunderthe2.2benefitformula.Membersretiringonoraftertheeffectivedate
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havetheoptionofupgradingtheirserviceearnedpriortoJuly1,1998,totheflat2.2percentformulabymakingapaymenttoTRS.Additionally,formemberswhocontinuetoteach,everythreefullyearsworkedafterJuly1,1998,counttowardafullone-yearreductionoftheyearstobeupgraded.
Amoneypurchase(actuarial)benefitispayableifitresultsinahigherannuitythaneitherthegraduatedor2.2formula.The75percentcapdoesnotapply to themoneypurchasebenefit.PublicAct94-0004eliminatesthemoneypurchasebenefitforpersonswhobecomeTRSmem-bersafterJune30,2005.
Essentiallyallretireesreceiveanannual3percentincreaseinthecurrentretirementbenefitbegin-ningJanuary1followingtheattainmentofage61orJanuary1followingthefirstanniversaryinretirement,whicheverislater.
Ifamemberleavescoveredemployment,TRSwillrefundamember’sretirementcontributionsuponrequest.Therefundconsistsofactualcontributions,excludingthe1percentdeathbenefitcontribution.
5. fundingMember,employer,andstatecontributionsarestatutorilydefinedbytheIllinoisPensionCode(40ILCS5/16),whichissubjecttoamendmentbytheIllinoisGeneralAssemblyandapprovalbytheGovernor.
EffectiveJuly1,1998,membercontributionsincreasedfrom8percentto9percentofsalary.Thesecontributionsareallocatedasfollows:7.5percentforretirement,0.50percentforpost-retirementincreases,and1percentfordeathbenefits.Thecontributionratechangedfrom9.0percentto9.4percenteffectiveJuly1,2005asaresultofPublicAct94-0004.Theadditional0.4percentistohelpcoverthecostofEROandisrefundableifthememberdoesnotretireusingEROoriftheEROprogramterminates.
Employercontributionsaremadebyoronbehalfofemployersfromseveralsources.TheStateof Illinoisprovides the largest sourceof contributions throughstateappropriations fromtheCommonSchoolFund.AdditionalsignficantsourcesofstatecontributionsinprioryearshavebeentheEducationalAssistanceFund,theGeneralRevenueFund,andtheStatePensionsFund.Employersalsomakecontributionsforthe2.2benefitformulaandforteacherswhoarepaidfromfederalfunds.Additionally,employerscontributetheirportionofthecostoftheEarlyRetirementOptionandanyexcesssalaryincreaseorsickleavecostsdue.
OnApril7,2003,PublicAct93-0002authorizedtheStateofIllinoistoissue$10billioningen-eralobligationbondsforthepurposeofmakingcontributionstodesignatedretirementsystems.TRSwasoneofthedesignatedretirementsystemsforthepurposeofthisnewlaw.Inaddition,thePensionContributionFundwascreatedasaspecialfundintheStateTreasury.
OVerlOOK IIIatlanta, geOrgIa
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OnJune12,2003,theStateofIllinoisissued$10billioningeneralobligationbonds,pensionfundingseriesofJune2003,anddepositedthenetbondproceedsof$7,317,292,916intothePensionContributionFund.Bondproceedsof$2,682,707,084wereutilized
• toreimbursetheGeneralRevenueFund$2,160,000,000forthelastquarterofthestate’sFY03requiredcontributionsandthetotalFY04requiredcontributionstothedesignatedretirementsystems,
• tofund$481,038,334ininterestpaymentsdueDecember1,2003andJune1,2004onthegeneralobligationbonds,pensionfundingseriesofJune2003,and
• tofundbondissuanceandothercoststotaling$41,668,750.
Thenetbondproceedsof$7,317,292,916wereallocatedamongthefivestate-fundedretirementsystemstoreducetheiractuarialreservedeficienciesasprovidedinPublicAct93-0002.Pursuantto the amendments to the General Obligation BondAct (30ILCS330/7.2), the Governor’sOfficeofManagementandBudgetdeterminedthepercentagedistributionoftheproceeds.Theallocationoftheproceedswasbasedonthepercentagedistributionofthestate’stotalactuarialreservedeficiencyasofJune30,2002.
TRS received an allocation of bond proceeds equal to $4,330,373,948 on July1,2003.ThemoniesweredepositedintoTRS’sMasterTrustaccountwithTheNorthernTrustCompanyonJuly2,2003.
The$4.330billioninpensionobligationbondproceedsreceivedinFY04werenotcountedascontributions towardsTRS’s annual actuarial funding requirements for FY04. State fundinglawprovidesfora50-yearfundingplanthatincludesa15-yearphase-inperiod.MinimumstatecontributionrateswerespecifiedinthestatuteforFY99throughFY04.InFY05,statecontri-butionswerereducedinaccordancewithfundingrevisionscontainedinthepensionobligationbondlaw.
InFY06andFY07,statecontributionsarebasedondollaramountsspecifiedbyPublicAct94-0004.Thelegislationcontainsatwo-yearfundingreductionofapproximately50percentorover$1billionforTRS.Statecontributionswillbehigherinfutureyearstomakeupforthetwo-yearfundingreduction,astheoverallgoalof90percentfundingintheyear2045isunchanged.
BeginningJuly1,1995,statecontributionshavebeenmadethroughacontinuingappropriation.However,inFY06andFY07thetotalstateappropriationsarespecifiedbythestatuteratherthanactuarialcalculations.
AdministrativeexpensesarebudgetedandapprovedbytheTRSBoardofTrustees.Fundingfortheseexpensesisincludedintheemployercontribution,asdeterminedbytheannualactuarialvaluation.
B. Summary of Significant accounting Policies1. Basis of accountingTRS’s financial statements are prepared using the accrual basis of accounting. Member andemployercontributionsarerecognizedasrevenueswhendue,pursuanttoformalcommitments,aswellasstatutoryorcontractualrequirements.Benefitsandrefundsarerecognizedasexpenditureswhentheyaredueandpayableinaccordancewiththetermsoftheplan.
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2. use of estimatesThe preparation of financial statements in conformity with accepted accounting principlesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofadditionstoanddeductionsfromnetassetsduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.
3. new accounting PronouncementsInApril2004,GASBissuedStatementNo.43,“FinancialReportingforPostemploymentBenefitPlansOtherThanPensionPlans”(OPEB).ThestatementrequiresthatOPEBplansaccruefortheliabilitiesofsuchbenefitsovertheworkingcareersofplanmembers.Currently,mostgovern-mentsponsoredOPEBplansarefundedonapay-as-you-gobasis.Thestatementpertainstotheplansthemselves,notparticipatingemployers.TRSstateagencyemployersparticipateintheStateEmployeesGroupInsurancePlan;otherTRSemployersparticipateintheTeachers’RetirementInsuranceProgram.Forbothofthesepostemploymentbenefitplans,therequirementsofthestatementareeffectiveforperiodsbeginningafterDecember15,2005.ThefirstdisclosurewillbefortheyearendingJune30,2007.
InMay2004,GASBissuedStatementNo.44,“EconomicConditionReporting:TheStatisticalSection,”anamendmentofNCGAStatement1.Thestatementestablishesandmodifiesrequire-mentsrelatedtothesupplementaryinformationpresentedinthestatisticalsection.Therequire-mentsofthisstatementwereeffectiveforstatisticalsectionspreparedforperiodsbeginningafterJune15,2005.TRShasimplementedGASB44intheyearendingJune30,2006.
InJune2004,GASBissuedStatementNo.45,“AccountingandFinancialReportingbyEmployersforPostemploymentBenefitsOtherthanPensions”(OPEB).ThestatementestablishesstandardsofaccountingandfinancialreportingforOPEBexpense/expendituresandrelatedOPEBliabilitiesorassets,notedisclosures,andrequiredsupplementaryinformation(RSI)inthefinancialreportsofstateandlocalgovernmentemployers.TherequirementsofthisstatementareeffectiveforTRS’sfinancialstatementsforperiodsbeginningafterDecember15,2006.ThefirstdisclosurewillbefortheyearendingJune30,2008.
4. Method used to Value InvestmentsTRSreportsinvestmentsatfairvalue.Fairvalueforequitiesisdeterminedbyusingtheclosingpricelistedonnationalandover-the-countersecuritiesexchangesasofJune30.Fairvalueforfixed income securities is determined principally by using quoted market prices provided byindependentpricingservices.Fairvalueforrealestateinvestmentsisdeterminedbyappraisals.Fairvalueforprivateequityassetsisdeterminedbyreviewingandevaluatingthereasonablenessofthevaluationsprovidedbythegeneralpartnerinaccordancewiththeprovisionsintheindi-vidualagreements.
5. Property and equipmentEquipmentisstatedonthebasisofhistoricalcost.Depreciationiscomputedusingthestraight-linemethodbasedupontheestimatedusefullivesoftheassets.Officefurnitureandequipmentareassignedausefullifeofthreeto10yearswhilevehiclesareassignedafive-yearlife.TRS’sofficebuildingisdepreciatedover40years.
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6. accrued compensated absencesWhen they terminate employment,TRS employees are entitled to receive compensation forall accrued but unused vacation time and one-half of all unused sick leave earned throughDecember31,1997.(Lump-sumpaymentsforsickleaveearnedpriortoJanuary1,1984,aresub-jecttoamaximumof60daysor420hours.)AccruedcompensatedabsencesasofJune30,2006,and2005totaled$1,376,394and$1,371,271,respectively,andareincludedasadministrativeandinvestmentexpensespayable.
7. receivablesReceivablesconsistprimarilyof1)memberandemployercontributionsowedandyettoberemittedbytheemployingdistrictsasofJune30and2)interest,dividends,realestateandprivateequityincomeowedtoTRSasofJune30.
TRSassessespenaltiesforlatepaymentofcontributionsandmaycollectanyunpaidamountsfromtheemployingdistrictsbyfilingaclaimwiththeregionalsuperintendentofeducationortheOfficeoftheComptrolleragainstfuturestateaidpaymentstotheemployer.TRSconsiderstheseamountstobefullycollectible.
MembersmayenterintoPayrollDeductionProgramagreementswiththeiremployerstopayfortheiroptionalservicebalances,torepayrefundspreviouslytakenfromTRS,topayfortheir2.2benefitformulaupgradebalances,ortopayestimatedEROcontributions.Termsandcondi-tionsoftheagreementsare:
• Amembermustbeemployedfulltime.
• Theagreementisirrevocableandcanbeterminatedonlyuponfullpaymentofthemember’sbalanceoruponthemember’sdeath,disability,retirement,orterminationofemployment.
• Theamountdeductedmustbeaminimumof$50permonthandcannotbechangedduringthetermoftheagreement.
• Agreementsmaybeginatthebeginningofeachcalendaryearquarter.
• ThemembermaynotmakedirectpaymentstoTRStoreducethebalanceunderwhichanagreementhasbeenentered.
Iftheagreementistopayfora2.2formulaupgradebalance,themaximumlengthoftheagree-ment is60months.TRShadoutstandingbalances inpayrolldeductionagreements totalling$51,724,086and$57,506,146asofJune30,2006,and2005respectively.
8. Prior Period reclassificationCertainprioryearamountshavebeenreclassifiedonabasisconsistentwiththecurrentyearpresentation.
9. risk ManagementTRS,asacomponentunitoftheStateofIllinois,providesforrisksoflossassociatedwithwork-ers’compensationandgeneralliabilitythroughtheState’sself-insuranceprogram.TRSobtainscommercialinsuranceforfidelity,surety,andproperty.Nomaterialcommercialinsuranceclaimshavebeenfiledinthelastthreefiscalyears.
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c. cashCustodialcreditriskfordepositsistheriskthatintheeventofabankfailure,TRS’sdepositsmaynotbereturned.TRSadoptedaformalpolicyduringFY06toaddresscustodialcreditrisk.Thepolicy’spurposeistominimizecustodialcreditriskthroughproperduediligenceofcustodyfinancial institutions and investment advisors; segregate safekeeping ofTRS assets; establishinvestmentguidelinesandendeavortohaveallinvestmentsheldincustodialaccountsthroughanagent,inthenameofcustodian’snominee,orinacorporatedepositoryorfederalbookentryaccountsystem.Forthoseinvestmentassetsheldoutsideofthecustodian,TRSwillfollowtheapplicableregulatoryrules.
Thenon-investmentbankbalanceandcarryingamountofTRS’sdepositswere$3,691,765and$3,867,280atJune30,2006,and$3,474,640and$3,777,107atJune30,2005.Ofthebankbalance,$3,567,765and$3,121,085wereondepositwiththestatetreasureratJune30,2006,and2005,respectively.Statetreasurerdepositsareinaninternalinvestmentpoolcollateralizedatathirdpartycustodialbankandarenotsubjecttocustodialcreditrisk.Theremainingbankbalanceof$124,000and$353,555atJune30,2006and2005,respectively,areamountsTRSdepositedandreceivedcreditforatTheNorthernTrustCompany,butNorthernhadnotyetreceivedthemoneyfromthepayor’sfinancialinstitution.Theamounts,calleduncollectedfunds,arenotsubjecttocustodialcreditrisk.CertaininvestmentsofTRSwithmaturitiesof90daysorlesswouldbeconsideredcashequivalents;theseconsistofbanksponsoredshort-terminvest-mentfunds,negotiablecertificatesofdeposits,commercialpaper,andvariousfuturesandoptioncontracts.Forfinancialstatementpresentationandinvestmentpurposes,TRSreportsitscashequivalentsasshort-terminvestmentsintheStatementsofPlanNetAssets.
Forpurposesofthisdisclosure,foreigncurrencyheldbyinvestmentmanagersisconsideredadeposit.However,forfinancialstatementpresentationandinvestmentpurposes,TRSconsidersforeigncurrencyaninvestmentasset.Uncollateralizedforeigncurrencysubjecttocustodialcreditriskwas$26,484,325and$20,862,357atJune30,2006andJune30,2005,respectively.
d. Investments1. Investment PoliciesThroughtheBoardofTrustees,asauthorizedintheIllinoisPensionCode,TRSservesasfiduciaryforthemembers’trustfundsandisresponsibleforinvestmentofthosefundsbyauthorityofthe“prudentpersonrule.”Thisruleestablishesastandardforallfiduciariesbyspecifyingfiduciaryresponsibilitywithregardtothemembers’trustfunds.
2. Investment riskCustodialCreditRiskCustodialcreditriskforinvestmentsistheriskthat,intheeventofafinancialinstitutionfailure,TRSwouldnotbeabletorecoverthevalueoftheinvestmentsinthepossessionofanoutsideparty.TRSadoptedaformalpolicyduringFY06toaddresscustodialcreditrisk.Thefollowingtablepresentsinvestmentsthatwereuninsuredandunregistered,withthesecuritiesheldbyacounterparty,butnotinTRS’sname:
6/30/06 6/30/05 GovernmentTreasuryNotes – $902,555IndexLinkedGovernmentBonds – 31,220,983NegotiableBankCertificatesofDeposit – 7,751,882Short-termBillsandNotesHeldwithBrokers $1,338,197 55,285,738CashDepositsHeldwithBrokersforVariationMargin 116,100 49,238,508 total $1,454,297 $144,399,666 Note: Beginning in FY06, foreign currency is considered a deposit for purposes of this disclosure. For compara‑tive purposes, FY05 information was reclassified.
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Quality corporate foreign debt u.S. agency rating debt Securities Securities Obligations Other* total Aaa $1,979,700,747 $235,375,908 $2,814,237,689 - $5,029,314,344 Aa1 126,634,211 15,950,748 1,758,474 - 144,343,433 Aa2 76,775,612 37,053,499 28,000,300 - 141,829,411 Aa3 259,815,386 36,128,610 106,372 - 296,050,368 A1 111,207,193 7,268,977 201,766 - 118,677,936 A2 128,549,253 44,153,283 - - 172,702,536 A3 137,714,809 42,971,816 - - 180,686,625 Baa1 89,734,559 63,315,484 - - 153,050,043 Baa2 212,134,786 43,346,880 - - 255,481,666 Baa3 118,480,875 6,384,943 4,262,571 - 129,128,389 Ba1 115,729,024 12,453,489 - - 128,182,513 Ba2 178,831,524 3,163,760 - - 181,995,284 Ba3 18,517,672 17,143,177 - - 35,660,849 B1 6,911,118 5,160,893 - 77,089,595 89,161,606 B2 26,089,728 2,173,375 - - 28,263,103 B3 4,675,600 1,438,992 - - 6,114,592 Caa1 874,881 295,572 - - 1,170,453NotAvailable - - - (3,157,583) (3,157,583) NotRated 52,335,632 83,104,367 18,290,504 - 153,730,503 Withdrawn 70 - - - 70 TotalCreditRisk:DebtSecurities $3,644,712,680 $656,883,773 $2,866,857,676 $73,932,012 $7,242,386,141
USGovernmentsandAgencies** - - 1,861,894,930 - 1,861,894,930
U.S.Treasuries** - - 1,433,704,715 - 1,433,704,715
TotalBonds,CorporateNotesandGovernmentObligations $3,644,712,680 $656,883,773 $6,162,457,321 $73,932,012 $10,537,985,786
* Includes commingled funds, interest rate and credit default swaps, and swaptions. Swap positions can be used to mitigate, or add to, the risk associated with various fixed income exposures, tiers, or sectors. The market value of swaps and swaptions is not indicative of actual exposure to counterparty risk.** Obligations of the U.S. government or obligations explicitly guaranteed by the U.S. government are not considered to have credit risk.
CreditRiskCreditriskistheriskthatanissuerorothercounterpartytoaninvestmentwillnotfulfillitsobli-gationstoTRS.Creditriskexposureisdictatedbyeachinvestmentmanager’sagreement.Eachportfolioismanagedinaccordancewithinvestmentguidelinesthatarespecificastopermissiblecreditqualityranges,exposurelevelswithinindividualsecurityqualityratingtiers,and/ortheaveragecreditqualityoftheoverallportfolio.Withtheexceptionofcommingledfunds,bondsbelowB-arenotpermissibleinanyofthefixedincomeinvestmentmanagerguidelines.However,incircumstanceswherepositiondowngradesoccur,investmentmanagershavebeengivenper-missiontoholdsecuritiesduetocircumstancessuchasahigherpeergroupratingfromanothernationallyrecognizedstatisticalratingorganization,theinvestmentmanager’sinternalratings,orothermitigatingfactors.
AsofJune30,2006,TRSheldthefollowingfixedincomeinvestmentswithrespectivequalityratings,excludingthoseobligationsoftheU.S.governmentorobligationsexplicitlyguaranteedbytheU.S.government,whicharenotconsideredtohavecreditrisk.
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commingled/ Quality corporate foreign debt u.S. agency closed end rating debt Securities Securities Obligations funds total Aaa $1,063,700,016 $327,676,193 $2,377,363,562 - $3,768,739,771 Aa1 84,205,161 8,856,817 955,170 - 94,017,148 Aa2 66,155,649 10,211,496 - 620,158,258 696,525,403 Aa3 540,277,352 21,399,522 - - 561,676,874 AA 5,769,581 - - - 5,769,581 A1 117,260,305 8,712,788 560,530 - 126,533,623 A2 111,571,412 41,244,582 5,015,506 - 157,831,500 A3 129,264,431 28,028,454 - - 157,292,885 Baa1 94,550,534 58,632,955 - - 153,183,489 Baa2 381,901,008 31,160,219 - - 413,061,227 Baa3 112,181,190 42,328,600 - - 154,509,790 Ba1 63,826,208 18,671,420 - - 82,497,628 Ba2 47,672,026 8,044,378 - - 55,716,404 Ba3 27,299,705 9,317,791 - 48,406,505 85,024,001 B1 22,156,273 32,315,563 - - 54,471,836 B2 15,877,496 1,217,650 - - 17,095,146 B3 8,500,013 658,350 - - 9,158,363 Caa1 6,609,388 - - - 6,609,388 Caa 3,611,418 - - - 3,611,418NotAvailable 4,104,203 11,224,776 - - 15,328,979 NotRated 16,521,938 - - - 16,521,938 Withdrawn 35,368,161 - - - 35,368,161 TotalCreditRisk:DebtSecurities $2,958,383,468 $659,701,554 $2,383,894,768 $668,564,763 $6,670,544,553
USGovernmentsandAgencies* - - 1,697,385,355 - 1,697,385,355
U.S.Treasuries* - - 1,957,811,175 - 1,957,811,175
TotalFixedIncome $2,958,383,468 $659,701,554 $6,039,091,298 $668,564,763 $10,325,741,083
* Obligations of the U.S. government or obligations explicitly guaranteed by the U.S. government are not considered to have credit risk.
ConcentrationofCreditRiskConcentrationofcreditriskistheriskoflossthatmaybeattributedtothemagnitudeofTRS’sinvestmentinasingleissue.TRS’sInvestmentPolicystatessecuritiesrepresentingdebtandequityofanyonecompanyshallnotexceed5percentofthefairvalueofanymanager’sportfoliowithoutpriorapproval.AtJune30,2006andJune30,2005TRSdidnothaveinvestmentsinanyoneorganizationrepresenting5percentormoreofTRSassetsotherthanthoseissuedorexplicitlyguaranteedbytheU.S.government.
InterestRateRiskInterestrateriskistheriskthatchangesininterestrateswilladverselyaffectthefairvalueofaninvestment.TRS’sfixedincomeinvestmentsaremanagedinaccordancewithoperationalguide-linesthatarespecificastothedegreeofinterestrateriskthatcanbetaken.TRSmanagestheinterestrateriskwithintheportfoliousingvariousmethods,includingeffectiveduration,optionadjustedduration,averagematurity,andsegmentedtimedistribution,whichreflectstotalfairvalueofinvestmentsmaturingduringagiventimeperiod.InFY05,theSystemdisclosedtheoptionadjusteddurationmethod,buthasselectedtodisclosethesegmentedtimedistributioninFY06foreaseincomparabilityandstatewideinformationcompilation.
AsofJune30,2005,TRSheldthefollowingfixedincomeinvestmentswithrespectivequalityratings.
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The segmented time distribution of the various investment types ofTRS debt securities atJune30,2006andJune30,2005isasfollows:
2006 Maturity in Years Market less than 1 to 5 6 to 10 10 to 20 More thantype Value 1 Year Years Years Years 20 YearsU.S.Treasuries $1,433,704,715 $270,592,002 $610,149,352 $325,812,394 $77,136,780 $150,014,187U.S.FederalAgencies 1,612,335,642 833,744,349 367,432,569 175,687,738 214,431,570 21,039,416U.S.GovernmentIndexLinkedBonds 263,914,841 3,824,332 84,168,037 84,694,942 39,202,072 52,025,458U.S.GovernmentBackedMortgages 2,818,412,775 6,429 15,634,829 65,864,490 1,016,588,172 1,720,318,855U.S.Municipals(Taxable) 11,619,751 0 0 0 0 11,619,751u.S. corporate ObligationsAssetBackedSecurities 721,905,881 2,203,740 265,683,818 46,975,450 25,847,123 381,195,750CommercialMortgageBackedSecurities 527,255,346 0 0 35,652,693 17,402,809 474,199,844CollateralizedMortgageObligations 781,486,169 11,706 25,487,690 89,919 45,943,946 709,952,908Commingled/ClosedEndFunds* 77,089,595 0 0 77,089,595 0 0CorporateConvertibleBonds 2,945,437 0 0 0 0 2,945,437CreditObligations
Financial 955,446,107 78,372,019 539,336,808 227,665,301 3,941,720 106,130,259Industrial 544,794,865 27,036,179 174,739,721 168,075,086 61,905,703 113,038,176Utilities 133,348,472 11,790,419 70,424,837 26,060,526 3,405,578 21,667,112
Swaps/Swaptions/ Other assets (3,157,583) (445,532) (2,171,659) (86,433) 20,750 (474,709)foreign debt Obligations 656,883,773 72,483,030 174,006,436 148,702,522 61,741,509 199,950,276 total Bonds, corporate notes and government Obligations $10,537,985,786 $1,299,618,673 $2,324,892,438 $1,382,284,223 $1,567,567,732 $3,963,622,720
2005 Maturity in Years Market less than 1 to 5 6 to 10 10 to 20 More thantype Value 1 Year Years Years Years 20 YearsU.S.Treasuries $1,957,811,175 $643,652,805 $894,956,787 $142,994,153 $118,568,913 $157,638,517U.S.FederalAgencies 1,331,356,248 630,477,778 321,291,733 177,294,595 181,001,966 21,290,176U.S.GovernmentIndexLinkedBonds 346,564,816 0 126,768,398 149,343,456 7,863,693 62,589,269U.S.GovernmentBackedMortgages 2,371,367,541 383 7,528,571 74,772,484 816,749,099 1,472,317,004U.S.Municipals(Taxable) 12,527,227 0 0 0 5,015,506 7,511,721u.S. corporate ObligationsAssetBackedSecurities 614,698,386 3,334,403 249,408,890 52,182,747 21,311,370 288,460,976CommercialMortgageBackedSecurities 287,002,709 0 0 28,944,821 5,459,160 252,598,728CollateralizedMortgageObligations 587,153,543 0 2,942,085 123,630 64,169,826 519,918,002Commingled/ClosedEndFunds* 668,564,763 0 0 668,564,763 0 0CreditObligations
Financial 565,452,732 11,100,925 329,936,455 159,621,611 2,803,503 61,990,238Industrial 821,791,248 56,658,118 297,886,836 246,938,711 60,672,278 159,635,305Utilities 101,749,141 18,442,008 26,114,884 33,968,126 4,629,055 18,595,068
foreign debt Obligations 659,701,554 6,986,478 141,194,711 199,947,435 77,618,832 233,954,098 total Bonds, corporate notes and government Obligations $10,325,741,083 $1,370,625,898 $2,398,029,350 $1,934,696,532 $1,365,863,201 $3,256,499,102 * Weighted average maturity figures were used to place the commingled funds within the schedule.
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currency foreign currency equities fixed Income totalArgentinePeso $37,365 - - $37,365AustralianDollar 789,971 230,810,274 26,169,835 257,770,080BrazilianReal 23,937 136,629,481 - 136,653,418BritishPoundSterling 1,765,664 1,349,240,757 85,095,411 1,436,101,832CanadianDollar 228,811 68,573,862 15,064,599 83,867,272CzechKoruna - 16,929 - 16,929DanishKrone 10,663 30,964,077 - 30,974,740EgyptianPound 185,065 - - 185,065Euro 9,947,634 2,131,436,919 111,933,378 2,253,317,931HongKongDollar 227,425 191,574,469 - 191,801,894HungarianForint 1,368 6,620,329 - 6,621,697IcelandKrona (719,953) - - (719,953)IndianRupee - 9,451 - 9,451IndonesianRupiah 231,881 4,983,090 - 5,214,971JapaneseYen 18,050,855 1,116,078,296 44,374,037 1,178,503,188MalaysianRinggit 41,911 16,279,287 - 16,321,198MexicanPeso 524,871 33,640,995 487,104 34,652,970NewIsraeliShekel 88,749 6,314,693 - 6,403,442NewTaiwanDollar 543,290 190,826,183 - 191,369,473NewZealandDollar 758,417 18,346,596 6,758,259 25,863,272NorwegianKrone 50,242 49,450,370 - 49,500,612PhilippinePeso - 5,146,128 - 5,146,128PolishZloty - 10,397,421 - 10,397,421SingaporeDollar 286,826 46,123,066 - 46,409,892SouthAfricanRand 41,103 78,664,878 - 78,705,981SouthKoreanWon 117,168 291,388,627 - 291,505,795SwedishKrona 13,939 90,977,321 19,051,307 110,042,567SwissFranc 793,287 439,090,536 - 439,883,823ThaiBaht - 18,270,368 - 18,270,368TurkishLira 7 8,058,889 - 8,058,896 total Subject to foreign currency risk $34,040,496 $6,569,913,292 $308,933,930 $6,912,887,718
Investments in International Securities Payable in united States dollars - 848,448,548 347,495,188 1,195,943,736 total International Investment Securities $34,040,496 $7,418,361,840 $656,429,118 $8,108,831,454
domestic Investments - 12,613,030,506 9,881,556,668 22,494,587,174
total fair Value $34,040,496 $20,031,392,346 $10,537,985,786 $30,603,418,628
ForeignCurrencyRiskForeigncurrencyriskistheriskthatchangesinexchangerateswilladverselyimpactthefairvalueofaninvestment.TRS’scurrencyriskexposure,orexchangeraterisk,isprimarilyderivedfromitsholdingsinforeigncurrency-denominatedequity,fixedincomeinvestmentsandforeigncurrency.TRS’sinternationalequityandglobalfixedincomemanagers,attheirdiscretion,mayormaynothedgetheportfolio’sforeigncurrencyexposureswithcurrencyforwardcontractsoroptionsdependingupontheirviewsonaspecificcountryorforeigncurrencyrelativetotheU.S.dollar.
TRS’sexposuretoforeigncurrencyriskinU.S.dollarsasofJune30,2006isasfollows:
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currency foreign currency equities fixed Income totalAustralianDollar $1,172,965 $186,055,772 $12,202,400 $199,431,137BrazilianReal 40,406 97,423,708 - 97,464,114BritishPoundSterling 1,087,289 1,039,816,250 80,583,088 1,121,486,627CanadianDollar 410,967 41,389,874 17,124,339 58,925,180CzechKoruna 4,108 24,093 - 28,201DanishKrone 39,051 29,897,532 - 29,936,583EgyptianPound 319,899 5,432,914 - 5,752,813Euro 3,852,761 1,760,075,362 172,011,459 1,935,939,582HongKongDollar 353,275 113,211,528 - 113,564,803HungarianForint 348 31,515 - 31,863IndonesianRupiah 2,482,612 19,248,998 - 21,731,610JapaneseYen 9,524,287 939,294,878 16,234,999 965,054,164MalaysianRinggit 299,367 22,337,230 - 22,636,597MexicanPeso 892,188 27,908,148 8,550,901 37,351,237NewIsraeliShekel 543 498,067 - 498,610NewTaiwanDollar 86,956 129,028,454 - 129,115,410NewZealandDollar 3,934,384 31,106,509 8,526,210 43,567,103NorwegianKrone 195,589 24,559,777 - 24,755,366PhilippinePeso - 6,001,588 - 6,001,588PolishZloty 148,640 11,227,832 - 11,376,472SingaporeDollar 82,221 58,606,996 - 58,689,217SouthAfricanRand 123,051 62,191,736 12,270 62,327,057SouthKoreanWon 2,724,788 212,608,084 - 215,332,872SwedishKrona 184,820 79,148,408 16,091,882 95,425,110SwissFranc 187,156 374,041,213 - 374,228,369ThaiBaht 19,059 5,810,338 - 5,829,397TurkishLira - 18,795,994 - 18,795,994 total Subject to foreign currency risk $28,166,730 $5,295,772,798 $331,337,548 $5,655,277,076
Investments in International Securities Payable in united States dollars - 931,685,057 328,364,006 1,260,049,063 total International investment Securities $28,166,730 $6,227,457,855 $659,701,554 $6,915,326,139
domestic Investments - 12,559,737,020 9,666,039,529 22,225,776,549 total fair Value $28,166,730 $18,787,194,875 $10,325,741,083 $29,141,102,688
Inadditiontotheabove,TRS’sforeigncurrencyinvestmentsinrealestatewere$50,484,037atJune30,2006and$35,884,547atJune30,2005.TRShadforeigncurrencylimitedpartnershipswithfairvaluestotaling$0atJune30,2006and$9,964,474atJune30,2005.
3. Securities lending ProgramTheBoardofTrustees’policiespermitTRStouseinvestmentstoenterintosecuritieslendingtransactions—loansofsecuritiestobroker-dealersandotherentitiesforcollateralwithasimul-taneousagreementtoreturnthecollateralforthesamesecuritiesinthefuture.TRS’smastertrusteeistheprimarylendingagentfortheplan’sdomesticsecuritiesforcollateralof102percentofthemarketvalueofthesecuritiesandinternationalsecuritiesforcollateralof105percentofthemarketvalueofthesecurities.
Atyearend,TRShasnocreditriskexposuretoborrowersbecausetheamountTRSowestheborrowersexceedstheamounttheborrowersoweTRS.ThecontractwithTRS’slendingagentrequirestheagenttoindemnifyTRSiftheborrowersfailtoreturnthesecurities(andifthecol-
TRS’sexposuretoforeigncurrencyriskinU.S.dollarsasofJune30,2005isasfollows:
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lateralisinadequatetoreplacethesecuritieslent)orfailtopayTRSforincomedistributionsbythesecuritiesissuerswhilethesecuritiesareonloan.AllsecuritiesloanscanbeterminatedondemandeitherbyTRSortheborrower,althoughtheaveragetermoftheloansis121days.Inlendingdomesticsecurities,cashcollateralisinvestedinthelendingagent’sshort-terminvestmentpool,whichatyearendhasaweightedaveragematurityof54days.Therewerenosignificantviolationsoflegalorcontractualprovisions,andtherewerenoborrowerorlendingagentdefaultlossesknowntothesecuritieslendingagent.
AsofJune30,2006andJune30,2005,TRShadoutstandingloanedinvestmentsecuritieshavingamarketvalueof$4,788,220,451and$4,715,848,757,respectively,againstwhichithadreceivedcollateralof$4,873,673,805and$4,839,824,722,respectively.CollateralfromsecuritieslendingreflectedontheStatementsofPlanNetAssetsconsistsprimarilyofcollateralreceivedintheformofcash.
4. derivativesTRSinvestsinderivativesecuritiesasafundamentalpartoftheoverallinvestmentportfolio.Aderivativesecurityisaninvestmentwhosereturndependsuponthevalueofotherassetssuchascommodityprices,bondandstockprices,oramarketindex.Tovaryingdegrees,derivativetransactionsinvolvecreditrisk,sometimesknownasdefaultrisk,andmarketrisk.Creditriskisthepossibilitythatalossmayoccurbecauseapartytoatransactionfailstoperformaccordingtotheestablishedterms.Toeliminatecreditrisk,derivativesecuritiescanbeacquiredthroughaclearinghousethatguaranteesdeliveryandacceptstheriskofdefaultbyeitherparty.
Marketriskisthepossibilitythatachangeininterest,currency,orotherpertinentmarketrateswillcausethevalueofafinancialinstrumenttodecreaseorbecomemorecostlytosettle.Imposinglimitsonthetypes,amounts,anddegreeofriskthatinvestmentmanagersmayundertakeregulatesthemarketriskassociatedwiththeconstantlyfluctuatingpricesofderivatives.TheselimitsareapprovedbytheBoardofTrusteesandseniormanagement,andthederivativepositionsoftheinvestmentmanagersarereviewedonaregularbasistomonitorcompliancewiththelimits.
Duringtheyear,TRS’sderivativeinvestmentsincludedforeigncurrencyforwardcontracts,indexfutures,cashequivalentfutures,options,swaps,andswaptions.
ForeignCurrencyForwardContractsObjective: Foreigncurrencyforwardcontractsareagreementstoexchangethecurrencyofonecountryforthecurrencyofanothercountryatanagreed-uponpriceandsettlementdate.TRSusesthesecontractsprimarilytohedgethecurrencyexposureofitsinvestments.
Terms: Foreigncurrencyforwardcontractsareintheformofeitherforwardpurchasesorforwardsalesofforeigncurrency.ForwardpurchasesobligateTRStopurchasespecificforeigncurrencyatanagreeduponprice.ForwardsalesobligateTRStosellspecificforeigncurrencyatanagreeduponprice.AtJune30,2006,foreigncurrencyforwardpurchaseorsellcontractsincludedthefollowingcurrencies:Australiandollar,Britishpoundsterling,Canadiandollar,Chineseyuanrenminbi,euro,Japaneseyen,Mexicanpeso,NewTaiwandollar,NewZealanddollar,Singaporedollar,SouthKoreanwon,Swedishkrona,andU.S.dollar.Thesecontractshavevarioussettle-mentdateswithin12monthsofJune30,2006.
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Fair Value:AsofJune30,2006andJune30,2005,TRS’sopenforeigncurrencyforwardcontractshadanetfairvalueof$(663,933)and$10,840,085,respectively.Thisrepresentstheunrealizedgain/(loss)onthecontractsatJune30.
Market Value as of Market Value as ofJune 30, 2006 June 30, 2005
ForwardCurrencyPurchases $512,644,262 $456,926,270ForwardCurrencySales (513,308,195) (446,086,185) UnrealizedGain/(Loss) ($663,933) $10,840,085
FinancialFuturesObjective: Financialfuturesareagreementstopurchaseorsellaspecificamountofanassetataspecifieddeliveryormaturitydateforanagreeduponprice.Thesederivativesecuritiesareusedtoimproveyield,adjustthedurationofthefixedincomeportfolio,circumventchangesininterestrates,ortoreplicateanindex.
Terms:Futurescontractsarestandardizedandtradedonorganizedexchanges,therebyminimiz-ingTRS’screditrisk.Asthedailymarketvalueofthefuturescontractvariesfromtheoriginalcontractprice,againoralossisrecognizedandpaidtoorreceivedfromtheclearinghouse.AtJune30,2006andJune30,2005,TRShadoutstandingfuturescontractswithanunderlyingnotionalvalueof$3,682,521,295and$2,704,099,768,respectively.ContractualprincipalvaluesdonotrepresenttheactualvaluesintheStatementsofPlanNetAssets.Thecontractshavevari-ousexpirationdatesthroughMarch2008.
Fair Value:Gainsandlossesonfuturescontractsaresettleddailybasedonthechangeoftheindexorcommoditypricefortheunderlyingnotionalvalue.Becauseofdailysettlement,thefuturescontractshavenofairvalue.
fY06 fY06 fY05 fY05 number contractual number contractualtype of contracts Principal of contracts PrincipalFixedIncomeIndexFutures–Long 5,447 $752,085,250 1,361 $168,664,063FixedIncomeIndexFutures–Short (3,508) (365,874,031) (2,204) (246,377,719)InternationalFixedIncomeIndexFutures–Long* 24 3,348,324 1,422 18,811,006InternationalFixedIncomeIndexFutures–Short 0 0 (1,361) (51,155,057)U.S.StockIndexFutures–Long 11,744 1,930,275,240 11,657 1,899,948,375CashEquivalent(Eurodollar)Futures–Long 5,831 1,377,105,387 3,808 914,209,100CashEquivalent(Eurodollar)Futures–Short (61) (14,418,875) 0 0 total 19,477 $3,682,521,295 14,683 $2,704,099,768
* Includes options on futures for FY05.
FinancialOptionsObjective: Financialoptionsareagreementsthatgiveonepartytheright,butnottheobligation,tobuyorsellaspecificamountofanassetforaspecifiedprice,calledthestrikeprice,onorbeforeaspecifiedexpirationdate.Asawriteroffinancialoptions,TRSreceivesapremiumattheoutsetoftheagreementandbearstheriskofanunfavorablechangeinthepriceofthefinancialinstrumentunderlyingtheoption.Premiumsreceivedarerecordedasaliabilitywhenthefinancialoptioniswritten.
Terms: AtJune30,2006andJune30,2005,TRShadoutstandingoptionscontracts,includingoptionsonfutures,withunderlyingnotionalvalueof$1,913,991,322and$72,711,812,respectively.Contractualprincipal/notionalvaluesdonotrepresenttheactualvaluesintheStatementsofPlanNetAssets.ThecontractshavevariousexpirationdatesthroughDecember2007.
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Fair Value:FluctuationsinthefairvalueoffinancialoptionsarerecognizedinTRS’sfinancialstatementsasincurredratherthanatthetimetheoptionsareexercisedorwhentheyexpire.AsofJune30,2006andJune30,2005,thefairvalueofoptioncontractswritten,grossofpremiumsreceived,was($9,977,064)and$380,116,respectively.Thefairvaluerepresentstheamountneededtocloseallpositionsasofthatdate.Thefollowingtablepresentstheaggregatecontractualprincipal(notionalvalue)ofTRS’soutstandingcontractsatJune30,2006andJune30,2005.Contractualprincipalamountsareoftenusedtoexpressthevolumeofthesetransactionsbutdonotreflecttheextenttowhichpositionsmayoffsetoneanother.ForFY06,allpositionsareoptionsonfuturesrepresentingthecorrespondingfuturesexposure.
fY06 fY06 fY05 fY05 number contractual number contractualtype of contracts Principal of contracts PrincipalFixedIncomeWrittenCallOptions 0 $0 568 $15,697,907
FixedIncomeWrittenPutOptions 0 0 554 (4,405,895)
FixedIncomeCallOptionsonFutures (154) 2,789,600 0 0
FixedIncomePutOptionsonFutures (242) 3,630,000 0 0
CashEquivalentWrittenCallOptions(Eurodollar) 0 0 1,468 61,419,800
CashEquivalentCallOptionsonFutures 3,055 145,533,250 0 0
CashEquivalentPutOptionsonFutures 5,203 1,122,213,000 0 0
CashEquivalentCallOptionsonFutures(Non-dollar) 1,310 590,997,356 0 0
CashEquivalentPutOptionsonFutures(Non-dollar) 55 48,828,116 0 0 total 9,227 $1,913,991,322 2,590 $72,711,812
SwaptionsObjective:Swaptionsareoptionsonswapsthatgivethepurchasertheright,butnottheobli-gation,toenterintoaswapataspecificdateinthefuture.Aninterest-rateswaptiongivesthebuyertherighttopayorreceiveaspecifiedfixedrateinaswapinexchangeforafloatingrateforastatedtimeperiod.Conversely,thewriterofaswaptionsellstherighttoanotherparty,andthusisobligatedtopayorreceiveafixedrateinexchangeforafloatingrate,ifthebuyerexercisestheoption.Apurchased(long)callswaptiongivesthebuyertherighttoreceiveafixedrateinexchangeforafloatingrateforastatedperiodoftime.Inawrittencallswaption,theseller(writer)hastheobligationtopayafixedrateinexchangeforafloatingrateforastatedperiodoftime,iftheswaptionisexercised.Apurchased(long)putswaptiongivesthebuyertherighttopayafixedrateinexchangeforafloatingrateforastatedperiodoftime.Inawrittenputswaption,thesellerhastheobligationtoreceiveafixedrateinexchangeforafloatingrateforastatedperiodoftime,iftheswaptionisexercised.TRShasbothwrittenandpurchasedswaptionsinitsportfolio.Asthewriterofaswaption,TRSreceivesapremiumattheoutsetoftheagreement.Premiumsarerecordedasaliabilitywhentheswaptioniswritten.
Terms: At June 30, 2006, TRS had outstanding purchased call swaption exposure of$138,072,686,writtencallswaptionexposureof($22,798,766),andwrittenputswaptionexposureof($13,549,576).ThecontractshavevariousexpirationdatesthroughJune2007.TheexposureamountsdonotrepresenttheactualvaluesintheStatementofPlanAssets.
Fair Value: FluctuationsinthefairvalueofswaptionsarerecognizedinTRS’sfinancialstate-mentsasincurredratherthanatthetimetheswaptionsareexercisedorwhentheyexpire.AsofJune30,2006,andJune30,2005,thefairvalueofswaptioncontractswas($485,657)and$0,respectively.
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InterestRateSwapsObjective: Interestrateswapsareagreementsbetweentwoormorepartiestoexchangesetsofcashflowsoveraperiodoftime.Inthemostcommontypeofinterestrateswaparrangement,onepartyagreestopayfixedinterestpaymentsondesignateddatestoacounterpartywho,inturn,agreestomakereturninterestpaymentsthatfloatwithsomereferencerate.Longswappositions(receivefixed)increaseexposuretolong-terminterestrates;shortpositions(payfixed)decreaseexposure.
Terms:AtJune30,2006,TRSwasapartytointerestrateswapsineuro,poundsterling,andU.S.dollars.Theswapagreementshavevariousmaturitydatesrangingfrom2007to2035.Swapagreementstypicallyaresettledonanetbasis,whichmeansthatthetwopaymentstreamsarenettedout,withapartyreceivingorpayingonlythenetamountofthetwopayments.Paymentsmaybemadeattheconclusionofaswapagreementorperiodicallyduringitsterm.
Fair Value:The table below presents the fair value ofTRS’s interest rate swap exposure atJune30,2006.TheretirementsystemheldnointerestrateswapsatJune30,2005.
Par/notional Value receivable/(Payable)ReceiveFloating/PayFixed $81,900,000 $1,018,351ReceiveFixed/PayFloating 151,900,000 (3,256,206)
CreditDefaultSwapsObjective: Creditdefaultswapsarederivativeinstrumentsthatareconstructedtoreplicatetheeffectofinvestingindebtobligationsofcorporatebondissuersasameanstomanagecorporatebondexposure.Theriskofthecreditdefaultswapsiscomparabletothecreditriskoftheunder-lyingdebtobligationsofcorporateissuersthatcomprisethecreditdefaultswaps.Theownerofprotection(longtheswap)paysanannualpremiumtothesellerofprotection(shorttheswap)fortherighttosellabondatapreviouslyagreeduponvalueintheeventofadefaultbythebondissuer.Thepremiumispaidperiodicallyoverthetermoftheswaporuntilacrediteventofthebondissueroccurs.Intheeventofadefault,theswapexpires,andthesellerofprotectionmakesapaymenttothebuyer,whichisusuallybasedonafixedpercentageoftotalpar.Purchasedcreditdefaultswapsdecreasecreditexposure(buyingprotection),providingtherighttosellbondstothecounterpartyintheeventofadefault.Writtencreditdefaultswapsincreaseexposure(sellingprotection),obligatingtheportfoliotobuybondsfromcounterpartiesintheeventofadefault.
Terms:AtJune30,2006,TRShadbothpurchasedandwrittencreditdefaultswapsinitsport-folio.Theswapagreementshavevariousmaturitydatesrangingfrom2006to2020.TRSheldnocreditdefaultswapsduringFY05.Thetotalnotionalvalueofpurchasedcreditdefaultswaps(buyingprotection)was$28,220,000atJune30,2006.Thetotalnotionalvalueofwrittencreditdefaultswaps(sellingprotection)was$8,900,000atJune30,2006.
Fair Value:ThefairvalueofcreditdefaultswapsheldbyTRSatJune30,2006was$36,098.ThisamountrepresentsthenetamountofpaymentsduetoTRSundertheseagreements.
BasketDefaultSwapsObjective:Basketdefaultswapareproductsthroughwhichaninvestorgainseitherlongorshortexposuretoarelativelysmallbasketofcreditsoraspecificmarketsector.Theinvestoriseithersellingorbuyingprotectionagainstdefaultononeofthecreditsinthebaskettodefault,similartoacreditdefaultswap.Asellerofcreditprotectionagainstabasketofsecuritiesreceivesanupfrontorperiodicpaymenttocompensateagainstpotentialdefaultevents.Ifadefaulteventoccurs,the
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sellermustpaythebuyerthefullnotionalvalueofthereferenceobligationinexchangeforthereferenceobligation.Ifnodefaultoccurs,thebuyerlosesthepremiumpaid.Abuyerofcreditprotectionagainstabasketofsecuritiespaysanupfrontorperiodicpaymentuntileithermaturityordefault.Intheeventofadefault,thebuyerreceivesalump-sumpayment.
Terms: AtJune30,2006,TRShadbasketdefaultswapsbuyingprotectionwithatotalnotionalvalueof$79,725,000.TRSheldnobasketdefaultswapsatJune30,2005.Theswapagreementshaveexpirationdatesrangingfrom2010to2020.
Fair Value:The fair value of the basket default swaps held byTRS at June 30, 2006, was($470,171).ThisamountrepresentsthepaymentsduefromTRStocounterpartiesunderthetermsoftheagreements,withallpositionsstillopen.
e. reservesTRSmaintainsstatutoryreserveaccountsinaccordancewiththeprovisionsof40ILCS5/16-101et seq. In1997, the IllinoisGeneralAssemblypassed legislation thatallowed thecreditingofincomeatfairvalue,asopposedtobookvalue,totheBenefitTrustReserve.
1. Benefit trust 2006 2005BalancesatJune30 $36,580,437,823 $34,081,019,184
ThisreserveservesasaclearingaccountforTRSincomeandexpenses.ThereserveiscreditedwithcontributionsfromtheStateofIllinoisthatarenotspecificallyallocatedtotheMinimumRetirementAnnuityReserve,memberandemployercontributions,incomefromTRSinvestedassets,andcontributionsfromannuitantswhoqualifyforautomaticannualincreasesinannuity.
Thereserveaccumulates,with6percentinterest,thecontributionsbymemberspriortoretire-ment.Contributionshavebeen7.5percentofsalarysinceJuly1,1998.ContributionsarefullyrefundableuponwithdrawalfromTRS,excludinginterestcreditedthereon.Theinterestaccruedisrefundableonlyintheeventofdeath.Interestiscreditedasofthedateofretirementordeathofthoseretiringordyingduringtheyearandasoftheendofthefiscalyearforallothermembers.Interestiscomputedannuallybasedupontheindividualmember’sbalanceinthereserveatthebeginningofthefiscalyear.
ThisreserveischargedfortransferstotheMinimumRetirementAnnuityReserveandall
• refundstowithdrawingmembers,
• retirement annuity payments (except as provided by the Minimum RetirementAnnuityReserve),
• benefitsthatarepaidtotemporarilyoraccidentallydisabledmembers,
• deathbenefitspaid,and
• refundstoannuitantsforsurvivorbenefitcontributions.
Theexpectedbenefitpaymentsdonotequalthepresentvalueofthereserve.Theadditionalamountneeded(theunfundedactuarialaccruedliability)ascalculatedbytheactuarywas$22,412,024,000in2006and$21,989,811,000in2005.
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2. Minimum retirement annuity 2006 2005BalancesatJune30 $4,451,604 $4,199,293
Theminimumannuityissetbylawat$25permonthforeachyearofcreditableservicetoamaximumof$750permonthafter30ormoreyearsofcreditableservice.Toqualify,annuitantsarerequiredtomakeaone-timecontributionthatiscreditedtothereserve.Interestat6percentiscreditedtothereserveannuallybasedupontheaveragereservebalance.TheStateofIllinoisalsoappropriatedfundsnecessarytopaytheminimumbenefitsprovidedinthelegislation.Allbenefitspaidunderthisprogramarechargedtothereserve.Thisreserveisfullyfunded.
f. trS employee Pension Benefits1. Plan descriptionAllTRSemployeeswhoarenoteligibletoparticipateinTRSparticipateintheStateEmployees’RetirementSystem(SERS),whichisapensiontrustfundintheStateofIllinoisreportingentity.SERSisasingle-employerdefinedbenefitpublicemployeeretirementsystem(PERS)inwhichstateemployeesparticipate,exceptthosewhoarecoveredbytheStateUniversitiesRetirementSystem, Teachers’ Retirement System, General Assembly Retirement System, and Judges’RetirementSystem.SERS’sfinancialpositionandresultsofoperationsforFY06andFY05areincludedintheStateofIllinois’ Comprehensive Annual Financial Report(CAFR)fortheyearsendedJune30,2006,and2005,respectively.SERSalsoissuesaseparateCAFRthatmaybeobtainedatwww.state.il.us/srs, by writing to SERS, 2101SouthVeterans Parkway, Springfield, Illinois62794-9255, or by calling (217)785-7444.The State of Illinois CAFR may be obtained atwww.ioc.state.il.us,bywritingtoOfficeoftheComptroller,FinancialReportingDepartment,325WestAdamsStreet,Springfield,Illinois62704-1858,orbycalling(217)782-2053.
A summary of SERS’s benefit provisions; changes in benefit provisions; employee eligibilityrequirements,includingeligibilityforvesting;andtheauthorityunderwhichbenefitprovisionsareestablishedareincludedasanintegralpartoftheSERSCAFR.Alsoincludedisadiscussionofemployerandemployeeobligationstocontributeandtheauthorityunderwhichthoseobliga-tionsareestablished.
2. funding PolicyTRSpaysemployerretirementcontributionstoSERSbasedonanactuariallydeterminedper-centageoftheTRSemployeepayrollrepresentingTRSemployeeswhoaremembersofSERS.ForFY06,FY05,andFY04,theSERSemployercontributionrateswere7.792percent,16.107per-cent,and13.439percent,respectively.TRSmadetherequiredcontributionstoSERSforthecurrentyearandeachofthetwoprecedingyears.TRScontributionsfortheyearsendingFY06,FY05,andFY04were$416,093,$824,671,and$662,711,respectively.EffectiveforpayperiodsbeginningafterJuly1,1993,theTRSBoardofTrusteesoptedtopaytheemployeecontributionforallemployees.Thecontributionpickup(4percentforSERSmembers,9.4percentforTRSmembersbeginninginFY06,formerly9percentduringFY02throughFY05,and8percentinprioryears)wasincludedintheFY06andFY05administrativebudgetsapprovedbytheboard.EffectiveforpayperiodsbeginningafterJuly1,2005,theTRSBoardofTrusteesoptedtobeginphasingoutpayingtheemployeecontributionforallemployees.ThecontributionpickupforSERSmemberswasreducedto2percentinFY06andexpiredJuly1,2006.ThecontributionpickupforTRSmemberswasreducedto6percentinFY06,willbereducedto3percentinFY07,andexpiresJuly1,2007.
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TRSpaysanemployercontribution for itsemployeeswhoaremembersofTRS.AdditionalemployercontributionsfortheseemployeesarepaidbytheStateofIllinoisandareincludedintheannualstatecontributiontoTRS.
3. Post-employment Benefits – trS employeesInadditiontoprovidingpensionbenefits,theStateEmployeesGroupInsuranceActof1971requirescertainhealth,dental,andlifeinsurancebenefitsbeprovidedbythestate.SubstantiallyallTRSemployeesmaybecomeeligibleforpost-employmentbenefitsiftheyeventuallybecomeannuitants.HealthanddentalbenefitsincludebasicbenefitsforTRSretireesunderthestate’sself-insuranceplanandinsurancecontractscurrentlyinforce.Lifeinsurancebenefitsarelimitedto$5,000perannuitantwhoisage60orolder.
Costsincurredforhealth,dental,andlifeinsuranceforannuitantsandtheirdependentswerenotseparatedfrombenefitsthatwereprovidedtoactiveemployeesandtheirdependentsfortheyearsendedJune30,2006,and2005.However,post-employmentcostsforthestateasawholeforallstateagenciesordepartmentsfordependenthealth,dental,andlifeinsuranceforannui-tantsandtheirdependentsaredisclosedinthestate’sComprehensiveAnnualFinancialReport.Costinformationforretireesbyindividualstateagencyisnotavailable.Paymentsaremadeona“pay-as-you-go”basis.
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required Supplementary InformationScheduleofFundingProgress1
unfunded actuarial accrued liability actuarial accrued liability unfunded actuarial as a percentage actuarial Value of (aal-Projected funded accrued liability covered of covered Valuation assets unit credit) ratio (uaal) Payroll Payroll date (a) (b) (a)/(b) (b) - (a) (c) (b-a)/(c)6/30/97 $17,393,108,000 $26,951,585,000 64.5% $9,558,477,000 $5,013,583,000 190.7%6/30/98 19,965,887,000 29,908,241,000 66.8 9,942,354,000 5,323,403,000 186.86/30/99 22,237,709,000 33,205,513,000 67.0 10,967,804,000 5,698,117,000 192.56/30/00 24,481,413,000 35,886,404,000 68.2 11,404,991,000 6,062,884,000 188.16/30/01 23,315,646,000 39,166,697,000 59.5 15,851,051,000 6,430,612,000 246.56/30/02 22,366,285,000 43,047,674,000 52.0 20,681,389,000 6,785,236,000 304.86/30/03 23,124,823,000 46,933,432,000 49.3 23,808,609,000 7,059,032,000 337.36/30/04 31,544,729,000 50,947,451,000 61.9 19,402,722,000 7,280,795,000 266.56/30/05 34,085,218,000 56,075,029,000 60.8 21,989,811,000 7,550,510,000 291.26/30/06 36,584,889,000 58,996,913,000 62.0 22,412,024,000 7,765,752,000 288.6
ScheduleofContributionsfromEmployersandOtherContributingEntities1
annual required annual required Year federal and contribution contribution ended State employer per gaSB Percentage per State Percentage June 30 contributions2 contributions2 total Statement #25 contributed Statute contributed 1997 $377,969,000 $17,379,000 $395,348,000 $927,842,000 42.6% $395,269,000 100.0% 1998 460,439,000 17,246,000 477,685,000 983,312,000 48.6 478,439,000 99.8 1999 567,068,000 36,535,000 603,603,000 932,909,000 64.7 592,547,000 101.9 2000 634,039,000 54,547,000 688,586,000 1,003,612,000 68.6 686,384,000 100.3 2001 719,357,000 58,985,000 778,342,000 1,102,441,000 70.6 775,732,000 100.3 2002 810,619,000 51,270,000 861,889,000 1,163,262,000 74.1 872,283,000 98.8 2003 926,066,000 44,779,000 970,845,000 1,427,519,000 68.0 963,858,000 100.7 2004 1,028,259,000 75,078,000 1,103,337,000 1,716,977,000 64.3 1,100,264,000 100.3 2005 903,928,000 83,434,000 987,362,000 1,683,212,000 58.7 986,269,000 100.1 2006 531,828,000 69,645,000 601,473,000 1,679,524,000 35.8 601,555,000 100.0
1 For consistency with figures reported by TRS’s actuaries, the amounts have been rounded to the nearest thousand. Actual contribu‑tions varied slightly from contributions that are required by statute mainly because of differences between estimated and actual federal contributions.
Pension obligation bonds are not treated as a state contribution in FY04 because they do not count towards the annual funding requirement calculated by the actuary. In FY03, the annual contributions required per state statute is the state funding requirement certified after Public Act 92‑0505 was enacted. The diversion to THIS Fund was effective for the entire fiscal year. In FY02, the annual contribution required per state statute is the state funding requirement certified before Public Act 92‑0505 was enacted. This act allowed districts to reduce their contributions to TRS by the amount they contributed to the Teachers’ Health Insurance Security Fund. The diversion was effective January 1, 2002 through June 30, 2003.
2 Excludes employer ERO and ERI payments, minimum retirement, and supplemental annuity contributions. Beginning in FY01, the supplemental annuity appropriation was not requested. These amounts are not counted for actuarial purposes. Beginning in FY06, employer contributions for excess salary increases are included.
See accompanying Independent Auditors’ Report.
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notes to required Supplementary InformationValuation dates June 30, 2006 June 30, 2005actuarial cost method: Projectedunitcredit Projectedunitcredit
amortization method:
a)ForGASBStatement#25reportingpurposes Levelpercentofpayroll Levelpercentofpayroll
b)Perstatestatute 15-yearphase-intoa 15-yearphase-intoa levelpercentofpayroll levelpercentofpayroll untila90%fundinglevel untila90%fundinglevel isachieved isachieved
However,FY06andFY07state FY05isthefirstyearthatstate contributionsarespecifiedby contributionswerecalculated PublicAct94-0004,notbasedon underthefundingmechanism the15-yearphase-in.FY08state containedinPublicAct93-0002 contributionwillincreasefrom Mimimumstatecontributionrates actualFY07contribution,returning wereeliminated. tothephase-inschedule.
remaining amortization period:
a)ForGASBStatement#25reportingpurposes 40years,open 40years,open
b)Perstatestatute 40years,closed 40years,closed
asset valuation method: Fairvalue Fairvalue
actuarial assumptions:
Investmentrateofreturn 8.5% 8.5%
Projectedsalaryincreases 5.9%(atage69)to10.2%(atage19); 5.9%(atage69)to10.2%(atage19); composite6.5% composite6.5%
Groupsizegrowthrate 0% 0%
Assumedinflationrate 3.5% 3.5%
Post-retirementincrease 3%compounded 3%compounded
Mortalitytable 1995BuckMortalityTables 1995BuckMortalityTables (ratedforwardthreeyears (ratedforwardthreeyears formalebenefitrecipientsonly; formalebenefitrecipientsonly; ratedforwardoneyearforfemale ratedforwardoneyearforfemale benefitrecipients;and95.6%timesthe benefitrecipients;and95.6%timesthe tableratesformaleretirees.) tableratesformaleretirees.)
See accompanying Independent Auditors’ Report.
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Other Supplementary InformationScheduleofAdministrativeExpensesfor Years ended June 30 2006 2005Personalservices $10,945,763 $10,787,362Professionalservices 1,015,544 981,768Postage 505,394 452,629Machinerepairandrental 876,807 462,559Othercontractualservices 1,028,647 765,214Commodities 457,939 506,844Occupancyexpense 169,096 172,652Depreciation 303,203 277,617Gain/(Loss)ondisposalofequipment 977 (2,930) total administrative expenses $15,303,370 $14,403,715
ScheduleofInvestmentExpensefor Years ended June 30 2006 2005Investmentmanagerfees $120,493,923 $104,343,041Privateequityinvestmentexpense 8,604,312 7,480,091Miscellaneous 3,098,050 3,073,754 total investment expense $132,196,285 $114,896,886
ScheduleofPaymentstoConsultantsfor Years ended June 30 2006 2005Actuarialservices $253,162 $390,392Externalauditors 102,529 119,254Legalservices 454,861 140,011Managementconsultants Informationsystems 155,496 227,000 TRSSTARaudit 20,000 41,990 Benchmarking 0 30,000 Boardandstafftraining 10,500 26,922 Operations 15,000 3,360 Other 3,996 2,839
total payments to consultants $1,015,544 $981,768
See accompanying Independent Auditors’ Report.
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INVESTMENTS
InVeStMentSPage 54
IntroductionTheTRSinvestmentportfoliohadanotherstrongyear,returning12.2percent,grossof fees.ThisnumberfollowsasuccessfulFY05performanceof11.1percent,grossoffees,asallassetclassesagainproducedpositivereturns.Overall,theU.S.economyremainedvibrantandinfla-tionrestrained,providingahealthyinvestmentenvironment.OutsideoftheU.S.,marketswereevenstrongerwithstockreturnsinthehigh20percentrangeledbycontinuedexpansionfromemergingmarketeconomies.SubstantialgainswereaccumulatedintheprivatemarketsinFY06withtheTRSprivateequityportfolioreturning23.8percent,netoffees,andtheTRSrealestateportfoliogeneratingan18.8percentreturn,netoffees.
TheTRSinvestmentportfoliocontinuedtorankhighlyagainstitspeers.Overthepast10years,TRSranksinthetopquartileofthelargepublicfundsintheWilshireTrustUniverseComparisonService(TUCS).
ReturnComparisonfortheYearEndedJune30,2006
TRS, gross of expenses
TUCS Large Public Funds
Median
Mellon Large Public Fund
Median
Consumer Price Index
TRS Actuarial Investment
Return Assumption
12.2%
10.6%
11.9%
4.3%
8.50%
0%
3%
6%
9%
12%
15%
Source: R.V. Kuhns & Associates, Inc., Wilshire Associates, The Northern Trust Company
TotalTRSinvestments,includingaccruedincome,increasedbymorethan$2.4billionduringtheyearendedJune30,2006.Allassetclasseshadanotherpositiveyearwithinternationalequityandprivateequityleadingtheway.Realestatehadanotherstellaryear,whiledomesticequityreturnswereabitbelowhistoricnormsandreturnedhighsingledigits.FixedincomewasflatinFY06,netoffees.
TheTRSportfolioisfullydiversifiedacrossdifferentassetclasses.Anumberofinvestmentman-agerswithineachassetclassensuretheappropriatemixtureacrossthevariousinvestmentstyles,
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allowingtheportfoliotoachievebroadexposuretothemarketwhileminimizingrisk.Thisbroaddiversificationservesasthebestdefenseagainsttheuncertaintyofvolatileworldmarkets.
TheTRStrustfundisinvestedbyauthorityoftheIllinoisPensionCodeunderthe“prudentpersonrule,”requiringinvestmentstobemanagedsolelyintheinterestoffundparticipantsandbeneficiaries.TheTRSInvestmentPolicyguidesTRS’sinvestments.Investmentprinciplesincludepreservingthelong-termprincipalofthetrustfund,maximizingtotalreturnwithinprudentriskparameters,andactingintheexclusiveinterestofTRSmembers.
As master trustee,The NorthernTrust Company has provided toTRS, unless otherwisenoted,detailedfinancialreportsofallinvestments,receipts,disbursements,purchasesandsalesofsecurities,andothertransactionspertinenttothefundfortheperiodJuly1,2005throughJune30,2006.Astatementofdetailedassets,alongwiththeirfairmarketvalue,wasalsoprovidedasofJune30,2006.Additionally,TheNorthernTrustCompanycalculatedperformanceratesofreturnbyportfolio,composite,andforallrespectiveindicesusedthroughoutthissection.TRSstaff,incollaborationwiththestaffofTheNorthernTrustCompany,preparedtheInvestmentSection.
Acompletelistingofinvestmentholdingsisavailableonrequest.
Summary data June 30, 2006total fund Market Value $37.580 billionOne-YearReturn(netoffees) 11.8%Five-YearReturn(netoffees) 7.9%Ten-YearReturn(netoffees) 9.0%PercentExternallyManaged 100.0%NumberofExternalManagers 101Custodian TheNorthernTrustCompanyGeneralConsultant R.V.KuhnsandAssociates,Inc.
TRSisranked32ndoutofthetop200U.S.pensionfunds/plansponsorsintheJanuary23,2006,issueofPensions & Investments.RankingsarebasedonmarketvalueoftotalassetsatSeptember30,2005.
fund Performance vs. Benchmarksand Market ValuesAsofJune30,2006,TRS’stotalinvestments,includingaccruedinvestmentincome,atmarketvaluetotaled$37.580billion,anincreaseof$2.432billionfromlastyear.
AsummaryofholdingsandassetsisdiscussedthroughouttheInvestmentSection.Thetotalsrepresenttheactualassets(grossofanyliabilities,amountsduetobrokers,andexpenses).Theliabilitiesofthefundareincludedinthefinancialstatementslocatedonpages26and27.
TRShadatotalfundannualizedreturnof12.2percent,grossoffees,and11.8percent,netoffees,fortheone-yearperiodendingJune30,2006.ThePerformanceSummarytableshowstheperformanceofthetotalinvestmentportfolioversuscomparativebenchmarks.
AsillustratedinthePerformanceSummarytable,TRS’stotalreturnforFY06surpassedthepolicyindexreturnof11.3percentfortheyearendedJune30,2006.Thepolicyindexrepresentsaweightedaverageofeachassetclassbenchmark,basedonthetotalfund’stargetassetallocation.Byexceedingthepolicyindex,TRSshowedconsistentoutperformanceacrossitsassetclasses.
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Thetotalreturnalsosurpassedthe8.5percentactuarialreturnassumptionandtherealrateofreturnexpectation,whichistoexceedtherateofinflation,asmeasuredbytheConsumerPriceIndex,by5.0percent.
PerformanceSummary(Netoffees) annualized at 6/30/06 Years ended June 30 3 5 10asset class/Index 2006 2005 2004 2003 2002 Years Years YearstrS total fund 11.8% 10.8% 16.5% 4.9% (3.2%) 13.0% 7.9% 9.0%TRSWeightedPolicyIndex 11.3 10.7 16.0 3.9 (4.2) 12.6 7.3 8.2CPI(Inflation) 4.3 2.5 3.3 2.1 1.1 3.4 2.7 2.6 trS equity - u.S. 9.6 8.1 21.6 0.5 (15.2) 13.0 4.2 8.1 Russell3000Index 9.6 8.1 20.5 0.8 (17.2) 12.6 3.5 8.6
trS fixed Income* 0.1 6.6 0.7 10.7 9.7 2.5 5.5 6.1 TRSWeightedFixedIncomeIndex (0.7) 6.8 0.3 11.1 10.0 2.1 5.4 5.6 LehmanBrothersAggregateIndex (0.8) 6.8 0.3 10.4 8.6 2.1 5.0 6.2
trS equity - International 27.3 17.3 32.8 (5.2) (6.8) 25.6 11.9 8.5 Non-U.S.EquityIndex 28.4 17.0 32.5 (4.2) (8.2) 25.8 11.9 7.2
trS real estate 18.8 19.9 13.2 8.8 2.4 17.3 12.4 12.1 RealEstatePropertyIndex 18.7 18.0 10.8 7.7 5.6 15.8 12.0 11.0
trS Private equity 23.8 20.0 10.3 (11.4) (12.7) 17.9 4.8 19.5 Russell3000Index+3.0%** 12.9 11.3 24.1 3.8 (14.7) 16.0 6.7 7.3
trS Short-term Investments 4.2 2.2 1.1 1.5 2.7 2.5 2.3 4.0 ML91-DayMarktoMarketsIndex 4.0 2.2 1.0 1.5 2.7 2.4 2.3 3.8
Thefollowingchartshowstheyearlyreturnsforthepreviousbenchmarks.
Years ended June 30asset class/Index 2006 2005 2004 2003 2002trS fixed Income - uS* - - - - 8.1%CitigroupBroad - - - - 8.5
trS fixed Income - International* - - - - 15.9Non-U.S.BondIndex - - - - 15.8
* During FY03, U.S. fixed income was combined with international fixed income to create a total fixed income asset class. The bench‑mark assigned to total fixed income is a weighted benchmark, based upon the Lehman Brothers Aggregate Index and the Barclay’s Global Investors Global Inflation‑Linked Unhedged Index. The TRS fixed income returns provided are the combined U.S. fixed income and international fixed income returns for prior periods and the current fixed income return.** Index compounded monthly.Note: Rates of return provided by the Northern Trust Company.
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asset allocation vs. targetsApensionfund’smostimportantinvestmentpolicydecisionistheselectionofitsassetallocation.Similartootherlargeinstitutionalfunds,TRSmaintainsawell-diversifiedportfoliotomanageriskeffectively.
FY06AssetAllocation Long-termTargetAllocation
RealEstate10.8%
InternationalEquity19.4%
Fixed Income23.3%
U.S. Equity41.8%
Short-termInvestments
0.5%
Private Equity4.2%
RealEstate14%
InternationalEquity15%
Fixed Income23%
U.S. Equity41%
Short-termInvestments
1%
Private Equity6%
FromanassetallocationstandpointduringFY06,TRSmadenomajorchangestothetargetweightingsandstructureadoptedin2002.Overthepastyear,domesticequity’sactualpercentagedroppedfrom44.4percentto41.8percentduetoTRS’sneedtomeetitsobligationtoitsbenefi-ciaries;itisnotduetounderperformanceofthisassetclass.TRScontinuestomakeinvestmentsinprivateequityandrealestateasitattemptstoincreasetheweightingsoftheseassetclassesuptotargetlevelsandiscomfortablewiththerecentpaceofinvestment.Privateequitynowstandsat4.2percentwithalongertermpolicytargetof6.0percent.
Theassetmixisperiodicallycomparedtothepolicytargetstodeterminewhenrebalancingofthefundorchangestotheinterimpolicytargetsarenecessary.TheStrategicInvestmentListingtableshowstheassetallocationtargets,asadoptedbytheBoardofTrusteesinApril2002,comparedtothetotalassetsassignedtoeachparticularassetclassatJune30,2006.
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StrategicInvestmentListingAllocationTargetsvs.TotalAssets 6/30/06 fY06 fY05 total fund actual Interim Policy actual Policy $ Million Percent target target Percent targetU.S.Equities $15,254 41.8% 43% 41% 44.4% 41%FixedIncome 8,520 23.3 25 23 24.1 23InternationalEquities 7,082 19.4 15 15 17.5 15RealEstate 3,946 10.8 12 14 10.5 14PrivateEquity 1,514 4.2 4 6 3.2 6Short-TermInvestments 181 0.5 1 1 0.3 1PendingSettlements/Expenses* 1,083 NA NA NA NA NA total fund $37,580 100.0% 100% 100% 100.0% 100%
* The liability portion is placed within the Statements of Plan Net Assets.
Portfolio Securities SummaryThePortfolioSecuritiesSummarytablecontainsadetailedlistofsecuritytypes.TheamountsinthistabledifferfromtheallocationpercentagesshownintheStrategicInvestmentListing.Thestrategiclistingrepresentsassetsassignedtomanagerswithineachassetclass,whereasthesecuritysummaryrepresentstypesoffinancialinstruments.Thedifferencesareexplainedbythetypesofinvestmentseachmanagerisallowedtoholdwithinitsportfolio.Forexample,aU.S.equitymanagerholdsnotonlycommonstockwithinitsportfolio,butitmayholdsmallamountsofshort-terminvestmentsaswell.
TheprincipaldifferencesbetweenthestrategicinvestmentapproachandthePortfolioSecuritiessummaryare:
• ThePacificInvestmentManagementCompanyStocksPlusandWesternAssetManagementenhancedassignmentsaretreatedasequityontheStrategicInvestmentListing,buttheyarecategorizedasbondsandcorporateobligationsinthesecuritiessummary.Thesemanagersprovideenhancedindexproductsthatusebothfixedincomeandfuturestoachieveanen-hancedequityreturn.
• Short-terminvestmentsincludedwithinamanager’sportfolioarecategorizedinthesamewayasthemanager’sprimaryassignmentontheStrategicInvestmentListing.Inthesecuritiessummary,theseinvestmentsarecategorizedasshort-terminvestments.
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PortfolioSecuritiesSummary 2006 2005
Market % of Market % of Value total Value totalu.S. government ObligationsU.S.Treasuries $1,433,704,715 3.8% $1,957,811,175 5.6%U.S.FederalAgencies 1,612,335,642 4.3 1,331,356,248 3.8U.S.GovernmentIndexLinkedBonds 263,914,841 0.7 346,564,816 1.0U.S.GovernmentBackedMortgages 2,818,412,775 7.5 2,371,367,541 6.7U.S.Municipals(Taxable) 11,619,751 0.0 12,527,227 0.0
total u.S. government Obligations 6,139,987,724 16.3 6,019,627,007 17.1
u.S. corporate ObligationsAssetBackedSecurities 721,905,881 1.9 614,698,386 1.8CommercialMortgageBackedSecurities 527,255,346 1.4 287,002,709 0.8CollateralizedMortgageObligations 781,486,169 2.1 587,153,543 1.7Commingled/ClosedEndFunds 77,089,595 0.2 668,564,763 1.9CorporateConvertibleBonds 2,945,437 0.0 – –
credit ObligationsFinancial 955,446,107 2.5 565,452,732 1.6Industrial 544,794,865 1.5 821,791,248 2.3Utilities 133,348,472 0.4 101,749,141 0.3
total u.S. corporate Obligations 3,744,271,872 10.0 3,646,412,522 10.4
Swaps/Swaptions (3,157,583) (0.0) - -
foreign debt Obligations 656,883,773 1.7 659,701,554 1.9
total Bonds, corporate notes,and government Obligations 10,537,985,786 28.0 10,325,741,083 29.4
equitiesCommonStock-U.S. 12,575,262,796 33.5 12,499,580,367 35.6PreferredStock-U.S. 37,767,710 0.1 60,156,653 0.2CommonStock-International 7,244,296,966 19.3 6,118,615,710 17.4PreferredStock-International 174,064,874 0.5 108,842,145 0.3
total equities 20,031,392,346 53.4 18,787,194,875 53.5
Short-termInvestments 1,516,251,424 4.0 1,413,132,556 4.0ForeignCurrency 34,040,496 0.1 28,166,730 0.1PrivateEquity 1,513,997,646 4.0 1,068,633,225 3.0RealEstateEquity 3,946,280,351 10.5 3,525,456,881 10.0
trS total Portfolio $37,579,948,049 100.0% $35,148,325,350 100.0%
reconciliation of trS Portfolio Securities Summary to total Investments
2006 2005TRSTotalPortfolio $37,579,948,049 $35,148,325,350Lessaccruedincome (243,067,231) (249,963,566)
Investments at fair value $37,336,880,818 $34,898,361,784
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Securities holdings (historical)Historically,TRShasadoptedvariousassetallocationstrategies.TheAssetAllocationtableshowstheactualassetallocationbasedonassettypesforthelastfive-yearperiod.
SecuritiesHoldingsforYearsEndingJune30asset type 2006 2005 2004 2003 2002Bonds,CorporateNotes, andGovernmentObligations 28.0% 29.4% 28.2% 30.3% 37.9%Equities-International 19.8 17.7 16.7 13.9 14.4Equities-U.S. 33.6 35.8 40.9 38.6 29.3PrivateEquity 4.0 3.0 2.6 2.8 2.6RealEstateEquity 10.5 10.0 8.3 10.0 9.5Short-TermInvestments/Currency 4.1 4.1 3.3 4.4 6.3
totals 100.0% 100.0% 100.0% 100.0% 100.0%
Source: TRSNote: During FY03, the U.S. fixed income asset class was combined with the international fixed income asset to create a total fixed income asset class. TRS’s allocation percentage of bonds for prior years is the combined total of U.S. bonds and international bonds.
Overtheyears,TRS’sassetallocationhasprovidedconsistentoverallreturns,asrepresentedbythefollowingchartshowingthegrowthof$10,000overthelast24years.Despitetheeconomicdownturnin2000through2003,theoveralltrendissolidlyfavorable.
Growthof$10,000
0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
July
200
4
July
200
2
July
200
0
July
199
8
July
199
6
July
199
4
July
199
2
July
199
0
July
198
8
July
198
6
July
198
4
July
198
2
u
Source: TRS
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ThefollowingsectionsprovideabriefandinformativeoverviewofthevariousassetclassesutilizedbyTRSfortheperiodendingJune30,2006.
u.S. equityU.S.equity,orcommonstock,representssharesorunitsofownershipinapubliccorporation.TRSinvestsinequitiesbecausetheassetclassofferstheopportunitytoparticipateinthesuccessoftheeconomyandspecificcorporationswithinit.Stockholdersshareinthegrowthofacompanythroughanincreaseinstockprice,aswellasthroughthedistributionofcorporateprofitsintheformofdividends.
Forthefiscalyear,TRS’sU.S.equityportfolioreturned9.6percentonanetoffeebasis,inlinewiththeRussell3000Indexreturnof9.6percent.One-,three-,five-and10-yearcomparisonstothisbenchmarkarenotedbelow:
fY06 3-Year 5-Year 10-YeartrS, net of fees 9.6% 13.0% 4.2% 8.1%Russell3000Index 9.6 12.6 3.5 8.6
AtJune30,2006,41.8percentofTRS’sinvestmentportfoliowasassignedtoU.S.equitymanag-ers.TRSemployedU.S.equitymanagerstouseactive,index,orenhancedindexmanagementstrategiesduringFY06.
Thetop10domesticequityholdings,excludingindexfunds,atJune30,2006,arelistedbelowandrepresent11.4percentoftotalU.S.equityholdings.Acompletelistingofinvestmenthold-ingsisavailableasaseparatereport.
top 10 u.S. equity holdings at June 30, 2006firm Market ValueGeneralElectricCo. $226,825,051
ExxonMobilCorp. 194,288,517
Citigroup,Inc. 176,535,775
Pfizer,Inc. 157,261,439
Hewlett-PackardCo. 126,546,932
ChevronCorp. 122,811,030
MicrosoftCorp. 114,343,329
ComcastCorp. 112,716,715
CiscoSystems,Inc. 108,328,184
ConocoPhillips 99,137,323
total $1,438,794,295
Source: The Northern Trust Company
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AsofJune30,2006,TRSemployed22domesticequitymanagers.Thefollowingchartliststhemanagersandassetsundermanagement.
u.S. equity Managers and assets under Management(inception date of account)IndexRhumbLineAdvisors,L.P.(5/06) $428,569,910StateStreetGlobalAdvisors(1/06) 1,524,984,689
enhanced IndexBarclaysGlobalInvestors(6/05) 990,370,626PacificInvestmentManagementCompany,L.L.C.(8/91) 937,762,903T.RowePriceAssociates,Inc.(6/05) 981,764,094WesternAssetManagementCompany,L.L.C.(4/05) 972,965,671large cap ValueBostonPartnersAssetManagement,L.P.(1/03) 862,223,512Dodge&Cox(4/00) 1,892,138,065EARNESTPartners,L.L.C.(2/02) 183,824,379GreatLakesAdvisors,Inc.(9/02) 162,534,916
large cap growthHollandCapitalManagement,L.P.(2/02) 315,598,501StateStreetGlobalAdvisors-Russell1000Growth(12/05) 347,980,948TurnerInvestmentPartners,Inc.(6/04) 1,168,233,419VoyageurAssetManagement,Inc.(11/04) 756,121,176
Small/Mid cap coreStateStreetGlobalAdvisors-RussellCompleteness(6/02) 447,617,709
Small/Mid cap ValueLSVAssetManagement(12/02) 720,339,910StateStreetGlobalAdvisors-OptimizedRussell2500Value(6/06) 204,147,868
Small/Mid cap growthDelawareInvestmentAdvisers(12/02) 352,968,915MazamaCapitalManagement,Inc.(1/03) 369,879,822TyghCapitalManagement,Inc.(6/06) 397,924,765
Small cap growthBatterymarchFinancialManagement,Inc.(11/04) 244,766,835EmeraldAdvisors,Inc.(11/04) 259,202,178MazamaCapitalManagement,Inc.(11/04) 110,153,243
Small cap ValueByramCapitalManagement,L.L.C.(11/04) 203,385,987Thompson,Siegel&Walmsley,Inc.(11/04) 261,856,870StateStreetGlobalAdvisors-OptimizedRussell2000Value(8/04) 106,754,472
emerging ManagerNCMCapitalAdvisors,Inc.(5/06) 49,566,996
DiscussionofU.S.EquityThelong-termtargetforTRSinvestmentsinU.S.equitiesis41percent.Investmentmanagersarechosentodiversifytheportfolioonbothacapitalizationandstylebasis.Thisdiversificationisimportantforcontrollingtheriskoftheportfolio,aswellasbalancingtheportfolioagainstthebroadbenchmarkandeconomy.
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capitalization Market Style
Large Cap80.4%
Small Cap6.4%
Small-Mid Cap13.2%
Value25.5%
Growth28.1%
Core46.4%
Source: TRS Investment Policy
The9.6percentreturnfortheRussell3000wasslightlybelowthehistoricalannualreturnforthebroadstockmarketofjustover10percent.Overall,performancewasgenerallyconsistentwiththeprevioustwofiscalyears.Smallcapstocksoutperformed largecapstocks,andvaluestocksoutperformedgrowthstocks.Smallcapstockshadameteoricandunexpectedriseinthefirstthreemonthsofcalendar2006,followedbyasomewhatpredictablefallinthesubsequentthreemonths.
NewadditionstoTRS’spoolofmanagersincludeTyghCapital,asmall-midcapgrowthman-agerbasedinPortland,Oregon,andNCMCapitalAdvisors,amidcapgrowthmanagerbasedinDurham,NorthCarolina.NCMwasfundedthroughthenewEmergingManagerprogram,whichseekstofundqualitymanagersthatwouldotherwisebetoosmallforconsideration.Inaddition,anew indexmanager,Boston-basedRhumbLineAdvisors,washired tomanageanS&P500portfolio.BearStearnsAssetManagement,J&WSeligman,SandsCapitalManagement,NorthernTrust,andArielCapitalManagementwereallterminatedduringtheyearforeitherorganizationalorperformancereasons.
StatisticalDataThefollowingtablesconveyvariousstatistics,includingattributionandsectoranalysis,oftheU.S.equityportfolioascomparedtoTRS’sdomesticequitybenchmark,theRussell3000Index.TheRussell3000Indexisabroadmarketbenchmarkrepresenting98percentoftheinvestibleU.S.equitymarket.
trS domestic equity as of June 30, 2006characteristic trS domestic equity russell 3000 IndexWeightedAverageMarketCap(billions) $51.9 $70.0Price/EarningsRatio 17.2x 17.7xDividendYield 1.4% 1.8%5-YearEPSGrowth 19.2% 15.8%Price/BookRatio 2.6x 2.7x
Source: The Northern Trust Company
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u.S. equity – diversification by Industry Sector for Year ending June 30, 2006 trS domestic russell 3000Sector equity Weighting Index WeightingConsumerDiscretionary 11.4% 15.1%ConsumerDurables 8.3 6.7Energy 9.0 10.2FinancialServices 21.9 19.2HealthCare 12.5 13.3Industrials 11.6 11.5Materials 3.4 3.5Technology 15.1 15.7TelecommunicationServices 3.1 2.0Utilities 3.7 2.8
total 100.0% 100.0%
Source: The Northern Trust Company
International equityInternationalequity,orcommonstock,representssharesorunitsofownershipinpubliccorpora-tionsdomiciledoutsidetheUnitedStates.Internationalinvestingprovidesimportantdiversifi-cationbenefitstotheTRSportfolio.Whiletheinternationaleconomyhasincreasinglybecomemoreglobalinnature,notalleconomiesmoveintandem.TRS’sinternationalequitymanagersareabletoparticipateinthestrengthofindividualmarkets,thusenhancingtheTRStotalportfolio.Additionally,corporationsworldwidehaveexpandedtheirglobalreach.Theinternationalequityportfolioisabletoseekoutsuperiorcompaniesoperatingmultinationally,orcompaniesthatareparticularlystrongintheirownmarketsorindustries.
FortheyearendedJune30,2006,theinternationalequityassetclassreturned27.3percentonanetoffeebasiscomparedtotheMorganStanleyCapitalInternational(MSCI)AllCountryWorldExcludingU.S.FreeIndex(identifiedasNon-U.S.EquityIndexinthefollowingandfuturereferences)returnof28.4percent.One-,three-,five-and10-yearcomparisonstothisbenchmarkareinthefollowingtable:
fY06 3-Year 5-Year 10-YeartrS, net of fees 27.3% 25.6% 11.9% 8.5% Non-U.S.EquityIndex 28.4 25.8 11.9 7.2
AtJune30,2006,19.4percentoftheTRSinvestmentportfoliowasassignedtointernationalequity managers.The following table lists the top 10 international equity holdings of activemanagersasofJune30,2006.Asisevidentintheholdingslist,theseinvestmentsarediversifiedgeographicallyandincludecompaniesthataredominantwithintheirindustryandfamiliartotheU.S.economy.Thesesecuritiesrepresent12.2percentofthetotalinternationalequityholdings.Acompletelistingofinvestmentholdingsisavailableasaseparatereport.
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top 10 International equity holdings at June 30, 2006firm country Market Value (uSd)GlaxoSmithKline UnitedKingdom $163,097,434Nestle Switzerland 96,396,225BP UnitedKingdom 95,433,041NovartisAG Switzerland 94,429,625TakedaPharmaceutical Japan 85,329,134RoyalBankofScotlandGroup UnitedKingdom 78,723,787Canon,Inc. Japan 78,537,055Telefonica Spain 74,000,333TotalSA France 71,459,715RocheHoldingsAGGenusscheine Switzerland 67,623,485 total $905,029,834
Source: The Northern Trust Company
AsofJune30,2006,TRSemployednineinternationalequitymanagers.Thefollowingchartliststhesemanagersandtheassetsundermanagement.
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International equity Managers and assets under Management(inception date of account)active coreBrandesInvestmentPartners,L.P.(2/98) $1,071,944,544HarrisAssociatesL.P.(3/03) 509,112,212INVESCOGlobalAssetManagement(N.A.),Inc.(6/00) 1,021,820,668Jarislowsky,FraserLimited(8/05) 468,885,185McKinleyCapitalManagement,Inc.(8/05) 513,969,078MondrianInvestmentPartnerLimited(4/93) 1,059,343,038PyramisGlobalAdvisors(6/03) 1,067,212,352StateStreetGlobalAdvisors-OptimizedEAFEGrowth(8/05) 474,131,247
emerging MarketsGrantham,Mayo,VanOtterloo&Co.,L.L.C.(3/03) 895,721,969
DiscussionofInternationalEquityTheInternationalEquityManagerStructuretableprovidesafurtherbreakdownofthestyleswithintheinternationalequityportfolio.
International equity Manager StructuretargetInternational equity classificationPassiveNon-U.S. 7.5%ActiveCore 82.5EmergingMarkets 10.0total 100.0%
InternationalequitymarketscontinuedtopostimpressiveresultsfortheyearendedJune30,2006,returning28.4percentasmeasuredbytheNon-U.S.EquityIndex.Theemergingmarkets,whicharethedevelopingeconomiesintheinternationalmarketsandrepresenta13.4percentweightingintheinternationalindex,propelledtheinternationaladvancesandwereup34.9percent.Withinthe emerging markets, the Europe, Middle East, andAfrican (EMEA) region was the mostimpressivegainer,ledbyRussia’sriseof105.1percent.Russia,anoilproducingcountry,greatlybenefitedfromtheriseincrudeoilpricesandthestrongperformancefromtheenergysector.Theenergysectorledallinternationalequitysectorslastyearreturning38.9percent.Forthefirsttimesince1999,JapanwasthebestperformingdevelopedinternationalmarketfortheyearendedJune2006,rallyingby36.0percent.Japanwasdrivenbybetterrelativeeconomicgrowthandmoretransparencyintothefinancialservicesmarkets.Europeappreciatedby14.0percent,whichwasslightlyaheadoftheU.S.domesticadvances.
TheTRSinternationalequityportfoliohadstrongresultsforFY06returning27.3percent,netoffees.Despitetheimpressivereturn,theportfoliounderperformeditsindexby1.1percent,primarilyduetoanunderexposuretoJapanandCanada,regionsthatreturnedinexcessof32percent.
Onthesectorlevel,TRSwasunderexposedtoenergyandbasicmaterials,whichareindustriesoftenconsideredmuchmorecyclicalinnatureandnotpossessingthequalitylong-termcharac-teristicssoughtbyTRS’sinternationalequitymanagers.Energyandmaterialswerethetoptwoperformingsectors.Overall,theTRSinternationalportfolioprovedtobetoodefensiveinearly2006whenamorebalancedportfoliowouldhaveperformedwell.
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PortfolioCharacteristicsThenexttwochartsconveythe fundamentalcharacteristicsandtheregionalexposureof theinternationalequityportfolio.
International equity fundamental characteristics trS non-u.S.characteristic International equity equity IndexWeightedAverageMarketCap(billions) $48.7 $48.8Price/EarningsRatio 14.9x 15.8xDividendYield 2.6% 2.5%Price/BookRatio 2.3x 2.3x
Source: The Northern Trust Company and Wilshire Associates
RegionalAllocationComparisonJune30,2006TRSInternationalEquityExposure
Europe57.9%
Emerging Markets17.3%
North America(Ex. U.S.)
1.2%
Cash/Other2.0%
Japan15.7%
Pacific Rim(Ex. Japan)
5.9%
global fixed IncomeFixedincomeisa financialobligationofanentity including,butnot limitedto,corporations,governments,agencies,indices,ormunicipalities.Theseentitiespromisetopayaspecifiedsumofmoneyatafuturedateandrepresentacontractualobligationofadebtoraloan.Theissuerofdebtistheborrowerofcapitalandthepurchaser,orholderofbonds,isthecreditororlender.
Fixedincomeisanimportantassetclassas,inawell-diversifiedportfolio,theseinvestmentscanreducevolatility,offernegativecorrelationtootherassetclassesandprovideincomestreams,orcoupons,essentialtothegrowthoftheoverallportfolio.
FortheyearendedJune30,2006,TRSfixedincomemanagersearneda0.1percentreturn,netoffees,comparedtothe(0.7)percentreturnofthebenchmark,theFixedIncomeBlendedIndex.Theblendedindexisaweightedindex,basedonU.S.,non-dollarandglobalinflation-linkedtargets.One-,three-,five-and10-yearcomparisonstothisbenchmarkarenotedbelow:
fY06 3-Year 5-Year 10-YeartrS, net of fees 0.1% 2.5% 5.5% 6.1%TRSFixedIncomeBlendedIndex (0.7) 2.1 5.4 5.6
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As of June 30, 2006, TRS employed 12 fixed income managers overseeing assets of over$8.5billion,asidentifiedintheGlobalFixedIncomeManagersandAssetsUnderManagementtable.Thistablecategorizesmanagerassignmentsbycoreplus,core,globalinflation-linked,emergingmanager,andenhancedindexed.Itexcludesfixedincomeassetsmanagedbyotherassetclassesaspartofotherunderlyingstrategies.
Coreplusmanagersarefirmswithparticularskillsintheextendedbondsmarkets,suchashighyield,non-dollardenominated,andout-of-benchmarkinvestments.Followingdefinedparameters,thesemanagersareabletoofferenhancedreturnswhilemaintainingasimilarriskprofiletothatofacoremanager.
global fixed Income Managers and assets under Management (inception date of account)core PlusBlackRock,Inc.(6/97) $1,309,021,347GoldmanSachsAssetManagement,L.P.(5/06) 84,124,091INGInvestmentManagementCompany(5/06) 651,649,899PacificInvestmentManagementCompany,L.L.C.(7/82) 1,651,337,191Payden&Rygel(6/97) 635,556,129Weiss,Peck&Greer/RobecoUSA(12/91) 828,455,374
coreDodge&Cox(11/03) 835,290,466EARNESTPartnersLimited,L.L.C.(2/02) 211,610,412Taplin,Canida&Habacht(3/04) 422,453,804
global Inflation-linkedWesternAssetManagementCompany(2/05) 427,584,729
emerging ManagerDolanMcEniryCapitalManagement,L.L.C.(5/06) 24,934,298
enhanced IndexedLehmanBrothersAssetManagement,L.L.C.(2/06) 654,248,617
The following table lists the top 10 fixed income securities held byTRS’s managers as ofJune30,2006.These securities represent9.4percentof the total fixed incomeassets.To-be-announced(TBA)mortgagesareunderlyingcontractsonmortgage-backedsecurities(MBS)tobuyorsellaMBSwhichwillbedeliveredatanagreed-upondateinthefuture.Acompletelistingofinvestmentholdingsisavailableasaseparatereport.
top 10 global fixed Income holdings at June 30, 2006Security/Position rate Maturity date Market ValueFederalNationalMortgageAssociationTBA 5.00% 1/15/2036 $233,260,737FederalNationalMortgageAssociationTBA 6.00 7/15/2034 128,272,482FederalNationalMortgageAssociationTBA 4.50 8/15/2018 127,533,150FederalNationalMortgageAssociationTBA 5.00 12/15/2020 85,671,012U.S.TreasuryNotes 5.13 5/15/2016 83,473,055U.S.TreasuryNotes 4.88 4/30/2008 76,656,483U.S.TreasuryNotes 4.50 11/15/2015 75,757,088U.S.TreasuryNotes 4.88 5/15/2009 60,516,852U.S.TreasuryNotes 3.63 6/30/2007 59,390,708U.S.TreasuryNotes 3.13 5/15/2007 58,898,460
total $989,430,027
Source: The Northern Trust Company
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DiscussionofGlobalFixedIncomeAtJune30,2006,23.3percentofTRS’sinvestmentportfoliowasassignedtofixedincomemanag-ers,justslightlyundertheinterimtargetof25.0percent.Overall,TRSreturned0.1percent,netoffees,comparedtotheLehmanBrothersAggregateIndexreturnof(0.7)percent,orexceedingthebenchmarkby80basispoints.
As seen in the performance chart, longer-term returns continue to exceed the benchmark asevidencedbytheoutperformanceovertheone-,three-,five-and10-yearperiods.The10-yearannualizedfixedincomereturn,netoffees,is6.1percentrelativetotheblendedbenchmarkreturnof5.6percent,orinexcessof50basispoints.
TheFederalReservecontinuedits“measuredpace”tighteningthroughouttheyear,raisingthefederalfundstargetrateeighttimesoverthepastyearfrom3.25percenttoalevelof5.25percentat June 30, 2006. However, atypical during federal tightening cycles, long-term rates actuallydeclinedamidstrisingheadlineinflation.
Asaresultofrisinginterestrates,asinterestratesandbondpricesmovedinversely,TRSexter-nalmanagersmaintainedadefensivepostureformostoftheyear.Inaddition,thecreditratingdowngradesofFordandGeneralMotors,andsubsequentpricedepreciation,slightlyreducedtheportfolio’sreturn.Positiverelativeperformancewasgeneratedfrominflation-indexedsecuri-ties,mortgagepositions,andvariousextendedmarketspositions,primarilyinemergingmarketdebt.
ThefollowingdataprovidesstatisticalinformationonTRS’sglobalfixedincomeportfolio.
StatisticalDataglobal fixed Income Profile lehman lehman trS fixed Brothers trS fixed Brothers Income aggregate Income aggregate Portfolio Bond Index Portfolio Bond Index characteristic 6/30/06 6/30/06 6/30/05 6/30/05AverageMaturity 7.3years 7.4years 6.6years 6.8yearsEffectiveDuration 4.7years 5.0years 4.1years 4.2yearsAverageCoupon 5.1% 5.2% 4.7% 5.2%AverageQualityRating(Moody’s) AAA AA+ Aa1 Aa1CurrentYield 5.3% 5.2% 4.8% 5.0%
Source: Lehman Brothers, BGI, and TRS
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global fixed Income Managers Sector WeightingtrS fixed Income Portfolio 6/30/06U.S.Treasury 16.0%GovernmentBonds—Foreign 1.0U.S.FederalAgency 10.1AgencyBonds—Foreign 0.2AssetBackedSecurities—U.S.andForeign 6.1U.S.Mortgage-BackedSecurities 30.9CommercialMortgageBackedandCollateralizedMortgages 11.5U.S.CorporateorCreditSecurities 16.2CorporateorCreditSecurities—Foreign 1.8Inflation-LinkedSecurities—U.S.andForeign 5.0MunicipalandProvince 0.2PreferredStock 0.3NetShort-termInvestments 0.7total 100.0%
TotalU.S.andNon-U.S.FuturesExposure 19.3%TotalForeignCurrencyExposure 4.8TotalSwapExposure—Ex-Swaptions 3.7TotalHighYieldExposure 5.0TotalEmergingMarketsDebtExposure 1.2
Source: The Northern Trust Company and TRS
diversification by Quality rating for global fixed Income PortfoliosMoody’s Quality rating 06/30/06 06/30/05Agency 15.2% 13.1%Treasury 13.6 19.0Aaa 50.2 43.9Aa1throughAa3 5.5 9.1A1throughA3 4.5 4.3Baa1throughBaa3 5.1 7.0Ba1throughBa3 3.3 2.2B1throughB3 1.2 0.7Other* 1.4 0.7 total 100.0% 100.0%
* Other includes under B3 and unrated securities.Note: Chart includes Enhanced Equity Indexed underlying bond holdingsSource: The Northern Trust Company and TRS
Private equityPrivateequityincludesinvestmentsthatareplacedandtradedoutsideofthestockexchangesandotherpublicmarkets.Overthelongterm,theyareanattractiveinvestmentforpensionfunds,endowments,insurancecompanies,andothersophisticatedinvestors.Theinvestmentclassben-efitstheeconomybyprovidingneededcapitaltostart-upcompaniesandforcontinuedgrowthincompanies,privatelyheldfirms,andfirmsthatarerestructuringtobettercompete.Thereisadditionalriskinvestinginprivateequity,butwithskillfulselectionofmanagers,returnscanbesignificantlyhigherthanpublicequityinvestments.
Theassetclassiscommonlyreferredtoasprivateequity,eventhoughitincludesprivatelyplaceddebtinstruments.Often,thedebtincludesacontrolpositionthatissimilartoequitybecauseitallowsthedebtholdertoinfluencetheoperationsandmanagementofthecompany.TRSis
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widelydiversifiedacrossallsub-sectorswithinprivateequity,includingbuyout,venturecapital,subordinateddebt,anddistresseddebt.
TRSmeasuresprivateequityperformanceusingtheRussell3000stockindexplus300basispoints(3percentagepoints).Thebenchmarkdoesnotspecificallycompareperformancetotheprivateequityindustry,butrathertotheTRSlong-termexpectationthatprivateequityproducereturnssuperiortothepublicmarkets.Fortheone-yearperiodendingJune30,2006,privateequityoutperformedthebenchmarkby10.9percent.
Ingeneral,aninvestormustlookatamuchlonger-terminvestmenthorizontomeasurethesuccessofaprivateequityprogram.TRS’sinvestmentsinprivateequitymaintainaverystronglong-termresultaswell,outperformingthebenchmarkby12.2percentoverthe10-yearperiod.One-,three-,five-and10-yearcomparisonstothisbenchmarkarenotedinthefollowingtable:
fY06 3-Year 5-Year 10-YeartrS, net of fees 23.8% 17.9% 4.8% 19.5%Russell3000Index+3.0% 12.9 16.0 6.7 7.3
AtJune30,2006,4.2percentoftheTRSinvestmentportfoliowasassignedtotheprivateequityassetclass.TRShashired,ormadecommitmentsto,66privateequitypartnerships/funds.Thefollowingchartliststhepartnershipsandthecurrentassetsundermanagement.
Private equity Partnerships and assets under Management (inception date of account) BuyoutApolloInvestmentFundV,L.P.(5/01) $120,188,894ApolloInvestmentFundVI,L.P.(8/05)* 0CarlylePartnersIV,L.P.(12/04) 41,094,914Carlyle/RiverstoneGlobalEnergyandPowerFundII,L.P.(1/03) 137,349,340Carlyle/RiverstoneGlobalEnergyandPowerFundIII,L.P.(2/06) 8,624,275CastleHarlanPartnersIV,L.P.(5/03) 20,009,295CodeHennessy&SimmonsV,L.P.(2/05) 2,901,591DLJMerchantBankingPartners,L.P.(9/92) 3,935,357DLJMerchantBankingPartnersII,L.P.(3/97) 25,491,583DLJMerchantBankingPartnersIII,L.P.(9/00) 92,052,662ElevationPartners,L.P.(2/05)* 3,812,324EnergyCapitalPartnersI,L.P.(2/06)* 0EvercoreCapitalPartnersII,L.P.(4/03) 46,108,115GlencoeCapitalPartnersIII,L.P.(1/04) 7,802,116GlencoeCapitalInstitutionalPartnersIII,L.P.(6/04) 7,325,867GTCRFundVII/VIIA,L.P.(3/00) 49,086,643GTCRFundVIII,L.P.(7/03) 34,113,334HispaniaPrivateEquity,L.P.(5/04) 962,891ICVPartnersII,L.P.(12/05) 1,405,943KKR1996Fund,L.P.(5/97) 23,000,347LehmanBrothersMerchantBankingIII,L.P.(2/05) 35,924,016MesirowCapitalPartnersVII,L.P.(6/97) 3,110,414ReliantEquityPartners,L.P.(6/04) 4,696,552TCW/LatinAmericaPrivateEquityPartners,L.P.(5/97) 1,179,856ThayerEquityInvestorsV,L.P.(5/03) 38,257,286TPGPartnersIV,L.P.(12/03) 29,968,899TrivestFundII,Ltd.(6/96) 17,198,353VS&ACommunicationsPartnersII,L.P.(9/95) 2,516,049VSSCommunicationPartnersIV,L.P.(2/05) 9,813,033Welsh,Carson,Anderson&StoweCapitalPartnersX,L.P.(8/05) 12,023,441WindpointPartnersVI,L.P.(5/05) 1,024,168WPGCorporateDevelopmentAssociatesV,L.P.(11/97) 9,091,723
* Partnership was not funded at June 30, 2006; date reflects the TRS Board of Trustees approval.
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distressed debtCarlyleStrategicPartners,L.P.(2/04) 24,672,878MatlinPattersonGlobalOpportunitiesFundII,L.P.(1/04) 31,531,435OCMOpportunitiesFundV,L.P.(6/04) 32,812,701
Special SituationsBancFundVI,L.P.(12/02) 55,177,654BancFundVII,L.P.(5/05) 16,513,574
Subordinated debtMeritMezzanineFundIV,L.P.(2/04) 13,093,368PrismMezzanineFund,L.P.(5/04) 3,925,737SWPelhamFundII,L.P.(9/03) 15,515,213Welsh,Carson,Anderson&StoweCapitalPartnersIV,L.P.(2/05) 23,986,171WilliamBlairMezzanineCapitalFundII,L.P.(5/97) 15,316,758WilliamBlairMezzanineCapitalFundIII,L.P.(1/00) 22,215,990
Venture capitalApexInvestmentFundIII,L.P.(6/96) 2,591,279ApexInvestmentFundV,L.P.(8/03) 22,503,190CarlyleVenturePartnersII,L.P.(10/02) 104,659,286EdgewaterGrowthCapitalPartners,L.P.(11/03) 17,321,375EdgewaterGrowthCapitalPartnersII,L.P.(2/05) 3,668,737EvergreenPartnersIV,L.P.(12/02) 11,958,069FrontenacVI,L.P.(6/93) 1,047,073GraniteVenturesII,L.P.(5/05) 1,542,573HealthPointPartners,L.P.(6/04) 28,808,223HopewellVentures,L.P.(6/04) 1,386,016IllinoisEmergingTechnologiesFund,L.P.(6/04) 741,854PenmanPrivateEquityandMezzanineFund,L.P.(10/94) 3,492,171PeriscopeFundI,L.P.(6/97) 125,39121stCenturyCommunicationT-EPartners,L.P.(2/95) 1,617,032SCPPrivateEquityPartners,L.P.(5/97) 9,424,891SCPPrivateEquityPartnersII,L.P.(6/00) 58,123,535ShastaVentures,L.P.(12/04) 5,136,250VantagePointVenturePartnersIV,L.P.(6/00) 48,952,565WarburgPincusInternationalPartners,L.P.(9/00) 67,161,572WarburgPincusInternationalPartnersIX,L.P.(8/05) 28,983,845WPGEnterpriseFund,L.P.(11/89) 417,557WPGEnterpriseFundII,L.P.(8/94) 19,342,228WPGEnterpriseFundIII,L.P.(3/97) 30,165,604
DiscussionofPrivateEquityInApril2003,theTRSBoardofTrusteesadoptedatargetforprivateequityof6.0percent.Sincethisdecision,theportfoliohasbeensteadilyandprudentlyincreasingexposuretoprivateequityandisnow4.2percentoftotalfundvalue.Thetargetof6.0percent isexpectedtobeaccomplishedby2009,butissubjecttomanyfactors,suchaspublicmarketperformanceandavailabilityofqualityprivateequitypartnershipsinthemarket.ThefollowingchartsprovideafurtherbreakdownofthetargetedstyleallocationadoptedbytheTRSBoardascomparedtotheactualbreakdownatJune30,2006.
Private equity target and actual allocation as of June 30, 2006Subclasses target actualBuyout 60-70% 52%VentureCapital 10-20 31SpecialSituations/DistressedDebt/SubordinatedDebt 5-15 17total 100%
Source: TRS
Continued
DuringFY06,TRSmadenewcommitmentstoeightprivateequityfundstotaling$630million.Manyoftheinvestmentsoverthepastyearhavebeenwithinthebuyoutsectoroftheprivateequityuniversebecausemanyestablishedbuyout firmshavebeencomingbacktomarket foradditionalcapital.Venturecapitalcontinuestoprovideopportunities,butinvestmentsmustbeenteredintoprudently.Goingforward,theTRSTacticalPlancallsforinvestingapproximately$600to$800millionperyearforthenextfouryears.
real estateRealestateinvestmentsaredirectinvestmentsorownershipinlandandbuildingsincludingapart-ments,offices,warehouses,shoppingcenters,hotels,andfarmland.TRSalsoholdspartnershipinterestsinentitiesthatpurchaseandmanagepropertyandpassrentandsaleincomebacktoTRS.InvestmentinrealestateisintendedtoincreasetheTRStotalportfoliolong-termrateofreturnandreduceyear-to-yearvolatility.
Therealestateassetclassofferscompetitivereturns,providesdiversificationbenefitstoportfoliosofstocksandbonds,andalsoservesasahedgeagainstinflation.Additionally,realestateoffersastrongincomecomponenttopayprogrambenefitstoplanparticipantsandsurvivors.
BrYSOn SQuareatlanta, geOrgIa
InVeStMentSPage 74
AsofJune30,2006,TRShadover$3.9billioninrealestateassets,or10.8percentofthetotalfundportfolio.Fortheyear,TRS’srealestateinvestmentsreturned18.8percentonanetoffeebasisandoutperformedtheRealEstatePropertyIndexforthefourthconsecutiveyear.Realestateperformanceandbenchmarkcomparisonarenotedinthefollowingtable:
fY06 3-Year 5-Year 10-YeartrS, net of fees 18.8% 17.3% 12.4% 12.1%RealEstatePropertyIndex 18.7 15.8 12.0 11.0
Toenhancereturnsandreducerisk,TRSacquireshighqualitypropertiesdiversifiedbytypeandinlocationsthroughouttheUnitedStates.TRS’srealestateholdingsbytypeandgeographyare
exhibitedinthefollowingcharts.
RealEstateHoldingsbyType GeographicDiversificationasofJune30,2006 ofRealEstateHoldings asofJune30,2006
Other2.5%
Office23.0%
Industrial10.9%
Hotel Motel8.3%
Farm Land9.6%
Apartment19.9%
Retail25.8% West
27.4%
South32.3%
Other1.6%
East22.0%
Midwest16.7%
Note: The geographic diversification chart does not include farm land.
ProfessionalrealestateadvisorsmanagerealestateownedbyTRS.SeparateaccountmanagersadministerTRS’sdirectinvestmentsinrealestateassets.Closedendaccountsrepresentpart-nershipinterestsinrealestatefunds.AsofJune30,2006,TRShadthefollowingmanagersandassetsundermanagement.
InVeStMentSPage 75
real estate Managers and assets under Management (inception date of account)Separate accountsCapri/CapitalAdvisors,L.L.C.(12/91) $1,137,268,478Cozad/WestchesterAssetManagement,Inc.(5/91) 377,965,284CommonwealthRealtyAdvisors,Inc.I(9/91) 713,863,660CommonwealthRealtyAdvisors,Inc.II(11/92) 149,578,213CommonwealthRealtyAdvisors,Inc.III(5/03) 10,000KollBrenSchreiberRealtyAdvisorsI(6/93) 421,659,667KollBrenSchreiberRealtyAdvisorsII(5/96) 3,545,431LPCRealtyAdvisorsI,Ltd.(7/92) 297,383,056Stone-Levy,L.L.C.(4/95) 276,073,374
closed end accounts Capri/CapitalApartmentFundIII(3/90) 105,663,358CapriSelectIncomeFundII,L.L.C. 4,992,438CarlyleEuropeRealEstatePartners,L.P.(6/03) 50,484,037CarlyleRealtyPartnersIV(6/05) 34,069,919DLJRealEstateCapitalPartners,Inc.(3/96) 7,833,678JBCOpportunityFundII,L.P. 44,023,174JERRealEstatePartnersIII,L.P.(1/05) 44,020,080RREEFCapitalII,L.L.C.(11/96)* 312,629ThayerHotelIV 4,974,265WaltonStreetCapital,L.L.C.(7/03) 137,059,987
Open end accounts Hines-SumiseiU.S.CoreOffice(12/05) 25,846,510LionIndustrialTrust(4/05) 109,681,719
* In liquidation mode.
DiscussionofRealEstateInFY06,theTRSrealestateportfoliogrewfrom10.5percentofthetotalinvestmentportfolioto10.8percent.Overtheyear,anewcommitmentwasmadetotheHines-SumiseiU.S.CoreOfficefund,increasingtheportfolio’sexposureinthecoreofficesector.
Competitionamonginstitutionalinvestorsforqualityrealestateassetshasmadeitchallengingtomakenewinvestments,butTRSwasabletoaffordsomegrowthtowardtheinterimtargetof12percent.TRSwillcontinuetowardthistargetbyprudentlyseekingnewinvestmentsthatmeetTRSreturnexpectations.AlsoinFY06,TRScontinuedinearnesttoupgradethequalityoftherealestateportfoliobyrecognizingprofitsandsellingolderassets.ThisactivitywillcontinueinFY07.
Brokerage activityThefollowingtableshowsthetop50listedbrokersusedbyTRSexternalequitymanagersfortheyearsendedJune30,2006and2005.TRSmanagesacommissionrecaptureprogramaspartofitstradingstrategies.FortheyearendedJune30,2006,TRSrecapturedover$1.4millionincashthatwasreinvestedbackintothefund.Inaddition,TRSusesaportionofcommissionrecapturerefundstopayforinvestmentadministrativeexpenses.DuringFY06,TRSused$863,819ofcommissionrecapturedtooffsetexpenditures.
InVeStMentSPage 76
top 50 Brokers used by trS Managers fY06 fY05Broker commission commissionMerrillLynch&Co.,Inc.andallSubsidiaries(Worldwide) $1,490,020 $1,243,057GoldmanSachs&Co.(Worldwide) 1,444,989 841,114LynchJones&Ryan(Worldwide) 1,122,078 914,439UBSInvestmentBankandallSubsidiaries(Worldwide) 1,001,870 912,476J.P.MorganSecurities,Inc.(Worldwide) 729,448 545,788CitigroupandallSubsidiaries(Worldwide) 701,306 712,569MorganStanley&Co.,Inc.(Worldwide) 680,192 615,194CreditSuisse(Worldwide) 679,830 475,421PershingSecuritiesLtd.(Worldwide) 637,463 166,761LehmanBrothers,Inc.(Worldwide) 551,360 654,493StateStreetBrokerageServicesandallSubsidiaries(Worldwide) 430,258 951,834DeutscheBankandallSubsidiaries(Worldwide) 396,709 463,998Liquidnet,Inc. 395,219 225,547BearStearns(Worldwide) 337,475 297,196B-TradeServicesL.L.C. 325,621 224,752Jefferies&Company(Worldwide) 282,813 157,792InvestmentTechnologyGroup,Inc.(Worldwide) 270,857 400,765DresdnerKleinwortWasserstein 198,289 229,276IvySecurities,Inc. 170,178 7,825ThomasWeiselPartnersL.L.C. 166,091 106,903BancofAmericaSecurities 158,775 109,650CabreraCapitalMarkets,Inc. 156,206 182,567MelvinSecurities,Inc. 136,538 39,129Abel/NoserCorporation 134,078 180,615BMONesbittBurns 128,957 9,051Weeden&Co. 127,551 173,536ABNAMROandallSubsidiaries(Worldwide) 123,653 240,568SocieteGenerale(Worlwide) 115,701 55,835CantorFitzgerald&Co. 111,002 65,675MacquarieSecurities(Worldwide) 105,183 55,185CIBCWorldMarketsCorp. 100,861 131,059CreditLyonnaisSecurities(Worldwide) 99,918 87,576CapitalInstitutionalServices,Inc. 98,501 108,893Bernstein,SanfordC.&Co. 98,169 82,406Guzman&Company 97,230 36,059M.RamseyKingSecurities 95,602 110,478PiperJaffray&Co. 94,608 23,205RBCCapitalMarkets,Inc. 91,463 54,391FrankRussell,Inc. 88,938 30,589RaymondJames 84,092 64,847PrudentialEquityGroup 81,043 98,852PulseTrading,L.L.C. 80,397 84,272Instinet,L.L.C. 80,206 32,809RobertW.Baird&Company,Inc. 78,380 110,327Jones&Associates 77,354 76,898GardnerRich&Co. 76,771 244,234DaiwaSecurities(Worldwide) 71,988 32,628Needham&Company 71,877 24,359BancoPactual 71,690 5,332PacificCrestSecurities 71,262 21,559AllOthers(FY06,325Brokers) 3,653,787 3,641,054 totals $18,673,847 $16,360,838
Source: The Northern Trust Company and TRS
InVeStMentSPage 77
external Manager fee PaymentsFor the year ended June 30, 2006, fee payments to external investment managers totaled$120.384million,anincreaseof15.5percentfromtheyearendedJune30,2005.TheincreaseisattributabletoTRS’sincreasedallocationtotheprivatemarketsassetclasses,aswellasthedecreasingallocationtoTRSpassiveindexfunds.
AsummaryisprovidedintheScheduleofInvestmentManagerFeestable.
ScheduleofInvestmentManagerFeesInvestment Manager/account fY06 fY0521stCenturyCommunicationT-EPartners,L.P. $4,527 $41,434AdvisoryResearch,Inc. 145,094 304,811ApexInvestmentFundIII,L.P. 324,969 433,325ApexInvestmentFundV,L.P. 478,985 561,640ApolloInvestmentFundV,L.P. 0 1,069,197ApolloInvestmentFundVI,L.P. 711,929 0ArielCapitalManagement,Inc. 945,982 1,385,454ArtisanPartnersLimitedPartnership 26,950 207,604BancFundVI,L.P. 1,001,875 892,733BancFundVII,L.P. 235,207 8,988BarclaysGlobalInvestors 1,677,979 73,841BatterymarchFinancialManagement,Inc. 1,484,440 782,316BearStearnsAssetManagement,Inc. 574,511 1,590,779BlackRock,Inc. 1,665,194 2,338,609BostonPartnersAssetManagement,L.P. 1,384,779 1,264,108BrandesInvestmentPartners,L.P. 3,872,812 3,463,353ByramCapitalManagement,L.L.C. 1,109,261 665,683CapitalGuardianTrustCompany 0 1,429,465Capri/CapitalAdvisors,L.L.C. 4,299,881 3,824,618CapriCapitalApartmentFundIII 1,277,372 1,177,859CapriSelectIncomeII,L.L.C. 374,818 0CastleHarlanPartnersIV,L.P. 330,316 557,406CodeHennessy&SimmonsV,L.P. 82,945 0CommonwealthRealtyAdvisors,Inc. 3,983,186 4,842,927Cozad/WestchesterAssetManagement,Inc. 1,842,085 1,916,448DelawareInvestmentAdvisers 3,284,008 2,946,669DLJMerchantBankingPartners,L.P. 0 0DLJMerchantBankingPartnersII,L.P. 195,597 191,138DLJMerchantBankingPartnersIII,L.P. 33,120 1,425,427DLJRealEstateCapitalPartners,Inc. 128,151 205,541Dodge&Cox 4,790,009 4,243,556DolanMcEniryCapitalManagement,L.L.C. 6,234 0EARNESTPartners,L.L.C. 1,141,435 559,372EdgewaterGrowthCapitalPartners,L.P. 0 0ElevationPartners,L.P. 149,359 203,707EmeraldAdvisers,Inc. 1,418,263 690,250EnergyCapitalPartnersI,L.P. 360,189 0EvercoreCapitalPartnersII,L.P. 815,485 1,000,000EvergreenPartnersIV,L.P. 619,180 619,180FrontenacVI,L.P. 0 0Geewax,Terker&Company 0 181,902GlencoeCapitalPartnersIII,L.P. 307,606 374,287GoldmanSachsAssetManagement,L.P. 104,604 0GraniteVenturesII,L.P. 194,740 0Grantham,Mayo,VanOtterloo&Co.,L.L.C. 6,903,426 4,766,309GreatLakesAdvisors,Inc. 374,621 262,726GTCRFundVII/VIIA,L.P. 0 156,728GTCRFundVIII,L.P. 0 154,679HarrisAssociates,L.P. 2,419,282 2,208,246HealthPointPartners,L.P. 344,935 890,180
InVeStMentSPage 78
HeitmanCapitalManagement 0 0Hines-SumiseiU.S.CoreOfficeFund,L.P. 60,008 0HispaniaPrivateEquity,L.P. 316,119 305,099HollandCapitalManagement,L.P. 958,086 1,055,381HopewellVentures,L.P. 383,273 280,946ICVPartnersII,L.P. 280,685 0IllinoisEmergingTechnologiesFund,L.P. 44,563 53,130INGInvestmentManagementCompany 79,694 0INVESCOGlobalAssetManagement(N.A.),Inc. 2,564,225 2,230,882J&WSeligman&Co.,Inc. 525,451 1,117,268Jarislowsky,FraserLimited 745,668 0JBCOpportunityFundII,L.P. 1,250,000 1,250,000JERRealEstatePartnersIII,L.P. 956,249 1,626,935KKR1996Fund,L.P. 18,936 27,714KollBrenSchreiberRealtyAdvisors 4,384,896 3,754,886LehmanBrothersAssetManagement,L.L.C. 98,091 0LehmanBrothersMerchantBankingPartnersIII,L.P. 750,000 536,301LionIndustrialTrust 903,095 83,703LMCapitalGroup,L.L.C. 98,619 282,705LPCRealtyAdvisorsI,Ltd. 2,426,821 1,534,943LSVAssetManagement 3,489,731 2,999,110MatlinPattersonGlobalOpportunitiesFundII,L.P. 986,173 1,709,173MazamaCapitalManagement,Inc. 2,691,432 1,992,959McKinleyCapitalManagement,Inc. 1,927,935 0MeritMezzanineFundIV,L.P. 885,887 436,077MesirowCapitalPartnersVII,L.P. 31,250 98,590MondrianInvestmentPartnersLimited 2,165,400 1,652,689NCMCapitalAdvisers,Inc. 20,721 0NorthernTrustGlobalInvestments 34,682 97,916NorthPointeCapital 0 213,216OCMOpportunitiesFundV,L.P. 312,500 312,499PacificInvestmentManagementCompany,L.L.C. 2,927,368 3,555,816Payden&Rygel 929,479 901,134PenmanPrivateEquity&MezzanineFund,L.P. 0 0PeriscopeIFund,L.P. 3,553 25,904PrismMezzanineFund,L.P. 626,973 1,080,126PyramisGlobalAdvisors 2,580,473 2,403,258ReliantEquityPartners,L.P. 186,213 219,390RhumbLineAdvisers,L.P. 5,766 0RREEFCapitalII,L.L.C. 0 113,411SandsCapitalManagement,Inc. 1,013,061 1,008,171SCPPrivateEquityPartners,L.P. 148,415 192,796SCPPrivateEquityPartnersII,L.P. 2,000,000 2,000,000ShastaVentures,L.P. 0 0StateStreetGlobalAdvisors 530,047 555,995Stone-Levy,L.L.C. 1,725,390 1,929,380SWPelhamFundII,L.P. 265,416 333,021T.RowePriceAssociates,Inc. 2,729,431 122,535Taplin,Canida&Habacht 471,057 284,040TCW/LatinAmericanPrivateEquityPartners,L.P. 0 70,232ThayerEquityInvestorsV,L.P. 354,473 670,374ThayerHotelIV 0 39,119TheCarlyleEuropeRealEstatePartners,L.P. 199,526 524,501TheCarlyleGroup 3,750,000 3,750,000TheCarlyleGroupPartnersIV,L.P. 1,276,903 333,332TheCarlyleGroup/RealtyPartnersIV,L.P. 922,625 525,000TheCarlyleGroup/RiverstoneGlobalEnergyFundII,L.P. 862,502 1,346,301TheCarlyleGroup/RiverstoneGlobalEnergyFundIII,L.P. 909,864 0TheCarlyleGroup/StrategicPartners,L.P. 749,830 400,026TheNorthernTrustCompany(Custody) 533,891 508,080
Investment Manager/account fY06 fY05Continued
InVeStMentSPage 79
Thompson,Siegel&Walmsley,Inc. 1,569,773 835,610TPGPartnersIV,L.P. 0 538,310TrivestFundII,Ltd. 12,994 42,389TurnerInvestmentPartners,Inc. 1,988,040 1,239,147TyghCapitalManagement,Inc. 157,915 0UBSGlobalAssetManagement(Americas),Inc. 1,432,903 1,082,183VantagePointVenturePartnersIV,L.P. 0 0VoyageurAssetManagement,Inc. 1,299,376 659,200VS&ACommunicationsPartnersII,L.P. 0 0VSSCommunicationsPartnersIV,L.P. 738,232 387,500WaltonStreetCapital,L.L.C. 993,097 377,866WarburgPincusInternationalPartners,L.P. 0 0WarburgPincusPrivateEquityIX,L.P. 746,534 0Weiss,Peck&GreerInvestments/RobecoUSA 633,533 656,706Welsh,Carson,Anderson&StoweCapitalPartnersIV,L.P. 250,864 0Welsh,Carson,Anderson&StoweCapitalPartnersX,L.P. 825,859 0WesternAssetManagementCompany 2,041,662 436,313WilliamBlairMezzanineCapitalFundII,L.P. 113,246 147,928WilliamBlairMezzanineCapitalFundIII,L.P. 383,744 563,512WindPointPartnersVI,L.P. 135,704 0WPGCorporateDevelopmentAssociatesV,L.P. 129,872 237,836WPGEnterpriseFund,L.P. 0 1,837WPGEnterpriseFundII,L.P. 150,955 158,104WPGEnterpriseFundIII,L.P. 262,332 400,360 total fees paid by trS $120,384,422 $104,221,360
Note: This schedule captures investment manager fees applicable to the fiscal year(s) reported and differs from investment fees reported within the Financial Section.
Securities lendingTRSparticipatesinsecuritieslendingactivitywithitscustodian,TheNorthernTrustCompany,actingasthesecuritieslendingagent.TheSecuritiesLendingSummarytableoutlinesthenetincomefromsecuritieslendingactivity,thesecuritiesonloan,andtheamountofcollateralforthesesecurities.
SecuritiesLendingSummaryIncome Source amountNorthernTrustFY06NetSecuritesLendingIncome $12,264,071TotalNorthernTrust(6/30/06)CollateralMarketValue $4,873,673,805TotalMarketValueofSecuritiesonLoanNorthernTrust(6/30/06) $4,788,220,451TotalCollateralizedPercentage 102%
Source: The Northern Trust Company
Duringtheyear,TRSalsoparticipatedinsecuritieslendingwithinitspassiveorindexedfundinvestmentsmanagedbyStateStreetGlobalAdvisorsandNorthernTrustGlobalInvestments.Theincomeearnedfromsecurities lendingactivitieswithinthese indexedfundsisreinvestedbackintotherespectivefund.
Investment Manager/account fY06 fY05Continued
at tained by chance. It must be sought for with ardeor and attended with diligence. Learning is not attained by chance It
Learningisnotattainedbychance.Itmustbesoughtforwithardorand
attendedwithdiligence.~AbigailAdams
1744-1818
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A C T U A R I A L
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Actuariesestimatethecostofbenefitsmembersandsurvivorswillreceiveovertheirlifetimesandcalculatetheamountthatshouldbesetasideeachyeartofundthem.
TRScomplieswiththerequirementsissuedbytheGovernmentalAccountingStandardsBoard(GASB)underStatementNo.25,Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans.
actuarial assumptions and MethodsEachyeartheactuaryreconcilesthedifferencesbetweenmajoractuarialassumptionsandexperi-enceintheprocessofexplainingthechangeinTRS’sunfundedliability.Theunfundedliabilityisthedifferencebetweentheaccruedliability(thepresentvalueofbenefitsincludingthecostofannualincreases)andthenetassetsthatareavailabletocovertheliability.
Inflation:3.5percentperannum.Implicitininvestmentandearningsprogressionassumptions.AdoptedintheFY02valuation.
Investment return:8.5 percentperannum,compoundedannually.AdoptedintheFY97valua-tion.ComponentsrevisedinFY02valuation:inflation3.5percent,realreturn5.0percent,withoverall8.5percentassumptionretained.
Earnings progression: Merit and longevity increases, adjusted for inflation.Approximates6.5percentperyearoveratypicalcareer.AdoptedintheFY02valuation.
Ratesshownbelowincludetheinflationassumption.
Sampleannualpercentagesalaryincreases:
age Male and female 20 10.1% 25 9.2 30 7.7 40 6.5 50andabove 5.9
Retirement age: Graduatedratesbasedonageandgenderofactivemembers.Inactivemembersareassumedtoretireatage62iftheyhavefewerthan10yearsofserviceoratage60iftheyhave10ormoreyearsofservice.AdoptedintheFY02valuation.ModifiedratesofretirementformembersretiringunderthePipelineEROinFY06andFY07wereadoptedintheFY05valuation.
Sampleannualretirementsper1,000participants:
age Male female 54 80.0 70.0 55 160.0 135.0 60 260.0 185.0 65 350.0 315.0 70 1,000.0 1,000.0
Mortality: Foractivemembers:74.6percentofthe1995GeorgeB.BuckMortalityTableratesformalesand83percentoftheGeorgeB.BuckMortalityTableratesforfemales.Forannuitants:95.6percentofthe1995GeorgeB.BuckMortalityTableratesformalesand100percentoftheGeorgeB.BuckMortalityTableratesforfemales.Forbeneficiaries,the1995GeorgeB.BuckMortalityTablesratedforwardthreeyearsformalesandratedforwardoneyearforfemales.For
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theperiodafterdisabilityretirement,thePensionBenefitGuarantyCorporationratesformaledisabledlivesnotnecessarilyreceivingSocialSecuritybenefits,ratedbacktwoyearsforfemalesandratedforwardfiveyearsformales,butnotlessthantherateatage65(afterthesetback).AdoptedintheFY02valuation.
Disability:AdoptedintheFY02valuation.
Sampleannualdisabilitiesper1,000participants:
age Male female 25 0.34 0.72 30 0.38 0.81 40 0.53 1.11 50 1.10 2.31 60 3.66 7.70
Termination from active service: AdoptedintheFY02valuation.
Sampleannualterminationsper1,000participants:
nonvested Members Vested Members age Male female Male female 25 88.0 105.0 61.1 90.0 30 88.0 105.0 41.2 80.0 40 88.0 75.0 15.8 25.0 50 88.0 65.0 10.4 16.5 60 88.0 65.0 18.6 22.8
Severance pay:Increaseswithyearsofserviceatretirement.AdoptedintheFY02valuation.
Years of Percent of retirees Severance Pay Service at Who receive as a percent retirement Severance Pay of final Salary fewerthan20 0.0% 0.0% 20–24 51.0 12.9 25–29 65.0 14.9 30ormore 79.0 16.9
Optional service at retirement: Theaccruedliabilityforretirementbenefitsforactivemem-berswhohavenotpreviouslypurchasedoptionalserviceisincreasedby1.9percenttocovertheemployercostofoptionalservicepurchasedinthelasttwoyearsofservice.Theoverallassumptionforoptionalservice(out-of-systemplusleavesofabsenceandlayoff )isanaverageof0.969ofayearperfull-time/part-timeserviceretiree.AdoptedintheFY02valuation.
Unused and uncompensated sick leave:Equals2.83percentofregularserviceatretirement.AdoptedintheFY02valuation.
Actuarial cost method:Projectedunitcredit.Gainsandlossesarereflectedintheunfundedliability.AdoptedintheFY89valuation.
Asset valuation method:Marketvalue.AdoptedintheFY97valuation.
UndertheprojectedunitcreditcostmethodusedbyTRS,theresultingliabilityforbenefitsearnediscalledthe“pensionbenefitobligation,”orPBO.Abroadertermforthisliabilityis“actu-arialaccruedliability,”orAAL.Inotherwords,thePBOisatypeofAAL.
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Also,measuresofTRS’sfinancialconditionforbothJune30,2006,andJune30,2005,areshownusingmarketvalueofassets.ThesetestsareconsistentwithTRS’sfinancialstatements,whicharepreparedinaccordancewithGASBStatementNo.25.ThechangetomarketvaluewasfirsteffectiveJune30,1997,fordeterminingstatefundingrequirementsforFY99.
TheactuarialvalueofassetsforFY06andFY05isequaltothe“netassetsheldintrustforpen-sionbenefits”asshowninthefinancialstatements.
annual actuarial ValuationTheannualactuarialvaluationmeasuresthetotal liabilityforallbenefitsearnedtodate.Theaccruedliabilityisapresentvalueestimateofallthebenefitsthathavebeenearnedtodate.Theunfundedliabilityisthepresentvalueoffuturebenefitspayablethatarenotcoveredbyassetsasofthevaluationdate.
Thefunded ratioshowsthepercentageoftheaccruedliabilitycoveredbynetassetsatmarketvalue.
ActuarialValuationwithMarketValueAssets($ in thousands) Years ended June 30 2006 2005total actuarial accrued liability $58,996,913 $56,075,029Lessactuarialvalueofassets(netassetsatmarketvalue) $36,584,889 $34,085,218 unfunded liability $22,412,024 $21,989,811Fundedratio 62.0% 60.8%
analysis of financial experience:reconciliation of unfunded liabilityThenetincreaseintheJune30,2006,unfundedliabilityof$422millionwascausedbyacom-binationoffactors.
The employer cost in excess of contributions istheshortfallbetweenactualemployercontribu-tionsandtheamountneededtocoverthecostofbenefitsearnedduringtheyearandtokeeptheunfundedliabilityfromgrowing.In2006,thisshortfallwas$1.913billion.In2005,theshortfallunderthismeasurementwas$1.300billion.
In 2006, there were no plan amendents increasing the unfunded liability. In 2005,PublicAct94-0004extendedtheEarlyRetirementOptionundermodifiedterms.Theadditional$771millioninliabilityisexpectedtobecoveredbymemberandschooldistrictcontributions.Theextendedprogramisdesignedtoberevenueneutraltothestate.
TRSexperiencedanactuarial lossunder thesalary increase assumption in FY06, with sal-ary increases for continuing active members $68million higher than expected, compared to$237million higher than expected in 2005. However, actuarial gains occurred in both yearsundertheinvestment return assumption.InFY06,assetswereassumedtoearn$2.833billion,butearningswereactually$3.993billion.Therefore,thetotalactuarialgainduetoinvestmentswas $1.160billion in FY06.The actuarial gain on investments was $682 million in FY05.
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Inbothyears,actuariallossesoccurredunderthe mortalityassumptionsbecausefewerpeoplediedthanexpected.Actuariallosseswerealsoincurredundertheturnoverassumptionbecausefewer people left service than assumed.Additionally, many members repaid refunds, and therepurchasedserviceincreasedtheunfundedliability.TherewerealsolossesassociatedwiththeEROcontributionratesandtheEROcontributionwaiversformemberswhohave34yearsofservice.Delayed reporting of retirementsalso increased theunfunded liabilitybecausemorepeoplewerereceivingbenefitsthanexpected.
Other,whichisabalancingitem,reflectsasignificantactuarialgainin2006becausefewerPipelineEROretirementsoccurredthanassumed.Amongnon-EROretirements,benefitswerelowerthanexpected,addingtotheactuarialgain.“Other”alsoincludestheeffectofretirementsthatwerereportedlatetotheactuary,theeffectofsalaryincreaseshigherthanassumedforretiringteach-ers,andseveralotherfactors.DuetothepotentialexpirationoftheEarlyRetirementOptionin2005,“Other”reflectedalossbecausemoreretirementsthanexpectedoccurred.
ReconciliationofUnfundedLiability($ in thousands) Years ended June 30 2006 2005unfunded liability at beginning of year $21,989,811 $19,402,722
net additions (deductions)Employercostinexcessofcontributions 1,913,368 1,299,840ModifiedEROunderPA94-0004 — 771,248ChangeinactuarialassumptionsforretirementratesinFY06andFY07 — 26,425 net additions (deductions) 1,913,368 2,097,513
net actuarial losses (gains) Salaryincreasesforcontinuingactivemembers 68,398 236,687Investmentreturn (1,159,525) (682,294)Newentrantloss 21,735 23,509Mortalityotherthanexpected 16,811 19,022Fewerterminationsthanexpected 20,116 18,830Repaymentsofrefundedmembercontributions1 28,543 23,459EROcostswaivedforthosewith34yearsofservice 198,867 487,173Delayedreportingofretirements(effectonassets)2 12,190 8,779Other (698,290) 354,411 net actuarial losses (gains) (1,491,155) 489,576 unfunded liability at end of year $22,412,024 $21,989,811
1 Includes the employer‑paid portion of the benefit that was restored when members repaid previously refunded contributions.2 401 retirements which occurred prior to 7/1/04 were not reported to the actuary until 6/30/05. 390 retirements which occurred prior to 7/1/05 were not reported to the actuary until 6/30/06.
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State fundingPublicAct88-0593wasenactedin1994andfirstaffectedstatecontributionsinFY96.Thelawestablisheda50-yearfundingplanthatincludesa15-yearphase-inperiod.Contributionsaregraduallyincreasedtoapercentagelevelofactivememberpayrollduringthephase-inperiod,withtheexceptionsnotedbelow.BytheendofthefundingperiodinFY45,TRSwillhavea90percentfundedratio.Akeyfeatureofthisactisthe“continuingappropriation”languagethatrequiresstatecontributionstobemadeautomaticallytoTRS.
PublicAct90-0582,the2.2legislation,wasenactedin1998andfirstaffectedstatecontributionsinFY99.Theactestablishedminimumstatecontributionratessothatthestate’scostofthefor-mulachangewouldbepaidasalevelpercentofpayinsteadofbeingphasedin.ThoseminimumstatecontributionrateswereineffectfromFY99throughFY04.
PublicAct93-0002,thepensionobligationbond(POB)legislation,wasenactedin2003andfirstaffectedstatecontributionsinFY05.Ofthetotal$10billioninPOBproceeds,$523millionwasusedtocoverinitialinterestpaymentsandtofundbondissuanceandothercosts.Thenext$2.160billionwasusedtoreimbursethestateforcontributionsitmadetothefivestateretirementsystemsforsomeofFY03andallofFY04.Theremaining$7.317billionwasallocatedamongthesystemstoinvestandtoreducetheirunfundedliabilities.Theallocationwasbasedontherelativesizesofthesystems’June30,2002,unfundedliabilities.TheTRSshareoftheproceeds,$4.330billion,wasdepositedonJuly2,2003.
TheFY05statecontributiontoTRSwasreducedbythesystem’sshareofthePOBdebtservice.Thecalculationwasperformedthroughamulti-stepprocessthatensuredthatstatecontributionsdidnotexceedcertainmaximumsprovidedintheact.
PublicAct 94-0004 specified certain dollar contributions toTRS for FY06 and FY07, asdescribedbelow.TheFY08statecontributionwillincreasefromtheFY07statecontribution,andstatecontributionswillcontinueincreasingasapercentageofactivememberpayrolluntilFY10.InFY10,theendofthe15-yearrampperiod,statecontributionsreachalevelpercentageofpay.Thatrateistobemaintainedforthefollowing35yearsuntilthe90percentfundedratioisachievedinFY45.
StateFundingAmountsTheFY06actuarialvaluationwasusedtodeterminetherequiredstatecontributionsforFY08andtheFY08employer’snormalcost.TheamountbeingcontributedtoTRSinFY07isspecifiedbyPublicAct94-0004andisnotbasedonactuarialfundingrequirements.However,theemployer’snormalcostforFY07wasdeterminedbytheFY05actuarialvaluation.
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State funding amounts fY08 fY07BenefitTrustReserve $1,039,195,000 $735,514,500(excludesfederalcontributions;excludesschooldistrictcontributions)Minimumbenefitreserve 2,100,000 2,500,000 total state funding amount $1,041,295,000 $738,014,500 Employer’snormalcostasapercentageofactivememberpayroll 8.22% 8.20%
tests of financial conditionThefunded ratioshowsthepercentageoftheaccruedliabilitycoveredbynetassets.
FundedRatioTest($ in thousands) actuarial funded as of net assets accrued ratio at June 30 at Market liability Market 1997 $17,393,108 $26,951,585 64.5% 1998 19,965,887 29,908,241 66.8 1999 22,237,709 33,205,513 67.0 2000 24,481,413 35,886,404 68.2 2001 23,315,646 39,166,697 59.5 2002 22,366,285 43,047,674 52.0 2003 23,124,823 46,933,432 49.3 2004 31,544,729 50,947,451 61.9 2005 34,085,218 56,075,029 60.8 2006 36,584,889 58,996,913 62.0
Theunfunded liability as a percentage of payrollisastandardmeasureoftherelativesizeoftheunfundedliability.Decreasesinthispercentageindicateimprovementsinasystem’sfinancialposition.
UnfundedLiabilityasaPercentageofPayrollTest($ in thousands) Year approximate ended Member unfunded PercentageJune 30 Payroll liability of Payroll 1997 $5,013,000 $9,558,477 190.7% 1998 5,323,000 9,942,354 186.8 1999 5,698,000 10,967,804 192.5 2000 6,063,000 11,404,991 188.1 2001 6,431,000 15,851,051 246.5 2002 6,785,000 20,681,389 304.8 2003 7,059,000 23,808,609 337.3 2004 7,281,000 19,402,722 266.5 2005 7,550,510 21,989,811 291.2 2006 7,765,752 22,412,024 288.6
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SolvencyTest($ in thousands) aggregate accrued liabilities for
Participants active Members’ currently Members Year accumulated receiving employer actuarial Percentage of Benefitsended contributions Benefits Portion Value of covered by net assetsJune 30 (1) (2) (3) assets (1) (2) (3)1997 $3,329,075 $13,091,057 $10,531,453 $17,393,108 100% 100% 9%1998 3,651,119 13,830,583 12,426,539 19,965,887 100 100 201999 3,956,022 14,935,811 14,313,680 22,237,709 100 100 232000 4,179,403 16,481,570 15,225,431 24,481,413 100 100 252001 4,386,648 18,718,472 16,061,577 23,315,646 100 100 12002 4,688,042 22,105,192 16,254,440 22,366,285 100 80 02003 5,622,026 25,188,870 16,122,536 23,124,823 100 69 02004 5,853,274 28,286,916 16,807,261 31,544,729 100 91 02005 5,925,696 32,861,473 17,287,860 34,085,218 100 86 02006 6,303,750 35,315,529 17,377,634 36,584,889 100 86 0
Other InformationThefollowingthreeschedulesarepresentedinthissection,ratherthanthestatisticalsection,tocomplywithGFOAguidelines.
• RetireesandBeneficiariesAddedtoandRemovedfromRolls
• AverageAnnual Salary forActive Members byYears of Service ( June30,1997, throughJune30,2006)
• ActiveMembersbyAgeandYearsofService(asofJune30,2006)
ThesescheduleswerepreparedbyTRSstaff,notouractuarialconsultingfirm.
InpreparingtheannualactuarialvaluationeachJune30,theTRSactuariesuseactiveandinactivememberdataasofthepreviousJune30,withactivemembersalariesincreasedby4.0percent.ThestatefundingcertificationforthenextfiscalyearmustbesubmittedannuallybyNovember15.
Thesolvency testmeasuresTRS’sabilitytocoverdifferenttypesofobligationsiftheplanwasterminatedandishypothetical.Thecolumnsareintheorderthatassetswouldbeusedtocovercertaintypesofobligations.Employeecontributionswouldberefundedfirst,amountsdueforcurrentbeneficiarieswouldbecoverednext,andtheemployer’sobligationforactivememberswouldbecoveredlast.Columns1and2shouldbefullycoveredbyassets.Theportionofcolumn3thatiscoveredbyassetsshouldincreaseovertime.TRSpassedtheminimumstandardsofthesolvencytestfrom1997through2001.
ScOttSdale fInancIal center IIIScOttSdale, arIZOna
RetireesandBeneficiariesAddedtoandRemovedfromRolls Year number removed number end-of-Year average ended at Beginning added from at end annual allowances annual allowance
June 30 of Year to rolls rolls of Year amount % Increase amount % Increase 1997 59,664 1,847 2,159 59,352 $1,173,889,332 3.7% $19,778 4.2% 1998 59,352 1,954 2,156 59,150 1,218,829,800 3.8 20,606 4.2 1999 59,150 3,445 2,287 60,308 1,322,451,864 8.5 21,928 6.4 2000 60,308 4,168 2,354 62,122 1,457,736,912 10.2 23,466 7.0 2001 62,122 5,197 2,442 64,877 1,643,900,223 12.8 25,339 8.0 2002 64,877 5,391 2,319 67,949 1,852,194,540 12.7 27,259 7.6 2003* 67,949 9,404 3,922 73,431 2,181,186,831 17.8 29,704 9.0 2004 73,431 6,016 2,542 76,905 2,432,132,334 11.5 31,625 6.5 2005 76,905 7,897 2,227 82,575 2,806,341,054 15.4 33,985 7.5 2006 82,575 5,147 2,619 85,103 3,018,848,450 7.6 35,473 4.4
* In the year ended June 30, 2003, statistical programs were revised and improved. This resulted in a much larger number reported as added to the rolls.
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Annual salaries are computed using full‑ and part‑time salary rates only; substitute and hourly employee salaries are omitted.Total payroll shown will be lower than payroll figures used elsewhere in this report.
AverageAnnualSalaryforActiveMembersbyYearsofService Years of Service 2006 2005 2004 2003 0-5 number 40,930 39,728 36,951 38,074 AverageSalary $42,404 $41,444 $37,633 $37,960
6-10 number 28,847 26,557 26,027 25,020 AverageSalary $51,314 $49,536 $45,568 $46,740
11-15 number 20,222 20,295 18,307 17,334 AverageSalary $60,476 $58,195 $52,771 $53,931
16-20 number 14,086 13,429 13,358 12,860 AverageSalary $67,343 $65,276 $59,820 $60,788
21-25 number 9,619 9,431 10,868 11,152 AverageSalary $72,531 $70,278 $64,881 $65,427
26-30 number 10,349 10,667 12,488 12,429 AverageSalary $76,616 $74,127 $69,276 $70,066
31-35 number 6,134 5,900 9,186 7,107 AverageSalary $83,165 $79,236 $75,643 $76,676
35 + number 785 744 1,162 804 AverageSalary $84,524 $81,497 $77,805 $78,091
total number 130,972 126,751 128,347 124,780 AverageSalary $56,916 $55,237 $52,181 $52,408
% change average Salary 3.0% 5.9% (0.4%) 3.0% total Payroll full & Part-time $7,454,402,352 $7,001,344,987 $6,697,274,807 $6,539,470,240
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2002 2001 2000 1999 1998 1997 41,120 38,585 35,192 34,831 33,325 33,134 $36,242 $34,614 $33,070 $32,430 $31,495 $30,717
24,258 24,351 24,053 21,540 20,329 20,340 $45,300 $43,457 $41,616 $40,320 $39,047 $38,170
16,812 16,367 15,661 15,461 14,571 13,830 $52,761 $50,875 $49,109 $47,430 $45,659 $44,258
12,215 11,692 11,304 11,969 13,004 14,295 $59,011 $56,521 $54,335 $52,477 $50,650 $49,309
12,575 13,091 13,363 14,006 14,494 15,235 $63,599 $61,188 $58,918 $57,256 $55,498 $54,096
13,256 13,885 14,278 14,541 13,904 12,977 $68,501 $65,913 $64,254 $61,866 $59,694 $58,168
7,484 7,555 6,895 6,018 4,845 3,525 $76,413 $73,433 $70,455 $67,373 $63,985 $61,434
843 809 713 692 644 611 $78,831 $75,469 $71,036 $67,453 $65,222 $62,841
128,563 126,335 121,459 119,058 115,116 113,947 $50,895 $49,230 $47,665 $46,306 $44,769 $43,398
3.4% 3.3% 2.9% 3.4% 3.2% 3.6% $6,543,213,885 $6,219,472,050 $5,789,343,235 $5,513,099,748 $5,153,628,204 $4,945,071,906
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ActiveMembersbyAgeandYearsofServiceasofJune30,2006
Years of Service age Subs 0-5 6-10 11-15 16-20 20-24 number 3,401 5,147 0 0 0 AverageSalary $3,930 $35,923 $0 $0 $0
25-29 number 3,963 16,576 3,599 0 0 AverageSalary $4,166 $41,125 $47,658 $0 $0
30-34 number 2,352 6,234 10,381 1,743 0 AverageSalary $4,102 $43,828 $51,017 $57,206 $0
35-39 number 2,836 3,674 4,608 6,828 1,207 AverageSalary $3,946 $44,273 $52,175 $59,917 $64,851
40-44 number 4,090 3,318 2,777 3,014 4,115 AverageSalary $4,121 $43,149 $51,604 $61,653 $67,530
45-49 number 3,573 2,612 2,825 2,562 2,512 AverageSalary $4,737 $43,829 $51,134 $59,866 $67,134
50-54 number 3,217 1,881 2,655 3,104 2,895 AverageSalary $4,678 $47,493 $53,015 $60,916 $66,672
55-59 number 2,695 1,144 1,585 2,399 2,699 AverageSalary $4,841 $57,541 $54,717 $62,275 $68,658
60-64 number 1,325 291 365 508 578 AverageSalary $4,571 $61,683 $56,020 $63,095 $69,468
65-69 number 568 44 42 60 64 AverageSalary $4,026 $47,521 $59,726 $68,994 $68,468
70-74 number 190 5 8 4 15 AverageSalary $3,769 $33,573 $52,533 $61,054 $58,732
74 + number 90 4 2 0 1 AverageSalary $3,094 $31,793 $46,966 $0 $48,702
total number 28,300 40,930 28,847 20,222 14,086 average Salary $4,308 $42,404 $51,314 $60,476 $67,343
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Years of Service 21-25 26-30 31-35 36-40 41-45 46-50 51-55 totals
0 0 0 0 0 0 0 5,147 $0 $0 $0 $0 $0 $0 $0 $35,923
0 0 0 0 0 0 0 20,175 $0 $0 $0 $0 $0 $0 $0 $42,290
0 0 0 0 0 0 0 18,358 $0 $0 $0 $0 $0 $0 $0 $49,163
0 0 0 0 0 0 0 16,317 $0 $0 $0 $0 $0 $0 $0 $54,573
963 0 0 0 0 0 0 14,187 $71,101 $0 $0 $0 $0 $0 $0 $57,704
3,439 1,494 0 0 0 0 0 15,444 $72,007 $74,036 $0 $0 $0 $0 $0 $60,813
2,618 5,890 2,655 0 0 0 0 21,698 $73,034 $76,847 $82,188 $0 $0 $0 $0 $67,943
2,054 2,405 3,122 356 0 0 0 15,764 $72,800 $77,598 $84,477 $85,301 $0 $0 $0 $70,890
481 478 305 283 47 0 0 3,336 $75,202 $76,594 $79,381 $84,712 $79,757 $0 $0 $70,539
55 74 47 35 37 7 0 465 $73,159 $79,808 $77,552 $85,831 $76,216 $121,968 $0 $71,771
8 6 4 1 8 5 1 65 $73,667 $72,431 $62,793 $66,283 $86,401 $84,523 $67,372 $65,168
1 2 1 0 2 1 2 16 $55,948 $44,099 $81,071 $0 $61,031 $75,206 $69,566 $51,964
9,619 10,349 6,134 675 94 13 3 130,972 $72,531 $76,616 $83,165 $85,053 $78,530 $103,969 $68,835 $56,916
full andPart-time
Member
average Years of average age Service numberFullandPart-timeMembers 42 12 130,972Substitutes 41 NA 28,300 all 41 159,272
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Plan SummaryAdministrationTRSwascreatedandisgovernedbytheIllinoisPensionCode,Article16.An11-memberBoardofTrusteesisauthorizedtocarryoutdutiesgrantedtoitunderthearticle.Theboardiscomprisedofthestatesuperintendentofeducation,fourpersonsappointedbytheGovernor,fourelectedmembersofTRS,andtwoelectedannuitants.Onetrusteepositionforanappointedmemberiscurrentlyvacant.TheBoardofTrusteesappointsanexecutivedirectorwhoisresponsibleforthedetailedadministrationofTRS.
MembershipMembership ismandatory forall full-time,part-time,andsubstitutepublic schoolpersonnelemployedoutsidethecityofChicagoinpositionsrequiringcertification.Personsemployedatcertainstateagenciesarealsomembers.
ContributionsDuring FY06, members contributed 9.4 percent of gross creditable earnings designated as7.5percentforretirementannuity,0.5percentforpost-retirementincreases,0.4percentfortheEarlyRetirementOption,and1percentfordeathbenefits.ActivemembersdonotcontributetoSocialSecurityforTRS-coveredemployment;however,membershiredafterMarch31,1986,arerequiredtocontributetoMedicare.Inaddition,virtuallyallmemberspayacontributiontotheTeachers’HealthInsuranceSecurityFund,aseparatefundintheStateTreasurythatisnotapartofthisretirementplan.ForFY06,themembercontributionwas0.8percentofpay.
ServiceCreditAmemberisgrantedamaximumofoneyearofservicecreditfor170paiddaysperschoolyear,definedbystatuteasJuly1throughJune30.OptionalservicecreditisavailableforperiodsofpublicschoolteachinginotherstatesorundertheauthorityoftheUnitedStatesgovernment,substituteorpart-timeteachingpriortoJuly1,1990,leavesofabsence,involuntarylayoffs,mili-taryservice,andgapsinteachingduetopregnancyoradoptionpriortoJuly1,1983.Uptotwoyearsofunused,uncompensatedsickleavethathasbeencertifiedbyformeremployersmayalsobeaddedatretirement.
ApayrolldeductionprogrambecameeffectiveJuly1,1998.Activeandcertaininactivememberscanmaketax-shelteredcontributionstoTRStopurchasevarioustypesofoptionalservice,toupgradetheirserviceunderthegraduatedretirementformulatothe2.2formula,ortomaketherequiredcontributionsundertheEarlyRetirementOption.
RefundsAfterafour-monthwaitingperiodfromthedatethatheorshelasttaught,amemberceasingcoveredemploymentmaywithdrawallcontributions,exceptthe1percentdeathbenefit.Whenacceptingarefund,thememberforfeitsallservicecreditandbenefitrights.Creditcanbere-establishedifthememberreturnstoacoveredpositionforoneyearortoareciprocalsystemfortwoyearsandrepaystherefundwithinterest.Amemberreceivingdisabilitybenefitsisnoteligibleforarefund.
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RetirementBenefitsThefollowingvestingscheduleappliestoallmembers.
Years of Service age 5 62 10 60 20 55(discounted) 35 55(nondiscounted)
Tobeeligibletoreceiveamonthlyretirementannuity,amembermustterminateactiveserviceandmeetspecificageandservicerequirements.Ifamemberretiresatanagelessthan60withfewerthan35yearsofserviceanddoesnotelecttheEarlyRetirementOption(discussedunder“EarlyRetirement”),thebenefitwillbereducedby6percentforeachyearthememberisunderage60.
AmemberwithfewerthanfiveyearsofcreditableservicewhotaughtafterJuly1,1947,iseligibletoreceiveasingle-sumretirementbenefitatage65.
Mostmembersretireunderaretirementbenefitformula.Thisretirementannuityisdeterminedbytwofactors:averagesalaryandyearsofcreditableservice.Averagesalaryistheaverageofthecreditableearningsinthehighestfourconsecutiveyearswithinthelast10yearsofcreditableservice.Yearsofservicedeterminethepercentageofthefinalaveragesalarytowhichmembersareentitled.MemberswithcontributingservicebeforeJuly1,2005,canretireunderamoneypurchasestyle“actuarial”benefitinsteadofaretirementbenefitformula.Bylaw,thehigheroftheformulabenefitortheactuarialbenefitispaid.Themaximumformulabenefitis75percentofFAS;thereisnomaximumfortheactuarialbenefit.
PublicAct90-0582 improved retirementbenefits forTRSmembersby changing the rate atwhichTRSmemberaccruebenefitsbeginningJuly1,1998,fromagraduatedratetoaflatrateequalto2.2percentoffinalaveragesalary.MemberswhoretireonoraftertheeffectivedatehavetheoptionofupgradingtheirserviceearnedpriortoJuly1,1998,totheflat-rate2.2percentformulabymakingapaymenttoTRS.Additionally,formemberswhocontinuetoteach,everythreefullyearsworkedafterJuly1,1998,counttowardafullone-yearreductionoftheyearstobeupgraded.
PublicAct91-0017reducedthe2.2formulaupgradecostonaslidingscaleformemberswhohavemorethan34yearsofservicecredit.Thelegislationalsomadeatechnicalcorrectioninthebenefitaccrualrateformemberswhodonotupgradetheirpre-July1998service.
YearsofserviceearnedbeforeJuly1,1998,wereearnedunderafour-stepgraduatedformula:
• 1.67percentforeachofyearsonethrough10,
• 1.9percentforeachofyears11through20,
• 2.1percentforeachofyears21through30,and
• 2.3percentforeachyearover30.
Themaximumannuity,75percentoffinalaveragesalary,isachievedwith34yearsunderthe2.2formulaandwith38yearsofserviceunderthegraduatedformula.Theminimumretirementbenefitis$25permonthforeachyearofcreditableserviceupto30yearsofservice.
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EarlyRetirementOriginal ERO.UnderaprovisionthatwasoriginallyscheduledtosunsetJune30,2005,memberswhowereage55orolderandhadmorethan20butfewerthan35yearsofservicecouldchoosetheEarlyRetirementOption(ERO)toavoidadiscountedannuity.UndertheERO,boththememberandtheemployerhadtomakeaone-timecontribution.However,boththememberandtheemployercontributionswerewaivedifthememberhad34yearsofservice.
Pipeline ERO. PublicAct94-0004extends,forcertainmembers,thetermsoftheprogramthatwasscheduledtosunset.The“Pipeline”EROappliestomemberswhonotifiedtheiremployersonorbeforeJune1,2005oftheirintentiontoretireunderthetermsofcontractsorcollectivebargainingagreements.ThesemembershaveuntilJuly1,2007toretireusingthePipelineEROprovision.ThecontributionratesremainthesameastheywerefortheEROprogramthatendedJune30,2005.
Modified ERO. PublicAct94-0004alsoincludesanewModifiedEROprogram.Theseprovi-sionsapplytomemberswhoretireafterJune30,2005,andwhodonotqualifyforPipelineERO.Themembercontributionchangedfrom7percentto11.5percentforeachyearundertheageof60ornumberofyearsunder35yearsofservice,whicheverisless.Theemployercontributionchangedfrom20percentto23.5percentforeachyearthememberisundertheageof60.Thereisnolongeracontributionwaiverforemployersandmemberswith34yearsofservice.
Post-RetirementIncreaseAnnuitantswhomeetcertainservicecreditcriteriareceiveanannual3percentincreaseintheirgrossannuitiesontheJanuary1aftertheyturnage61ortheJanuary1followingthefirstanni-versaryinretirement,whicheverislater.
DisabilityBenefitsTRS offers occupational and nonoccupational disability benefits to active members.Nonoccupationaldisabilitybenefitsarepayableasdisabilitybenefitsorasadisabilityretirementannuitytomemberswhohavethreeyearsofcreditableservice.There isnominimumservicerequirementforoccupationaldisabilitybenefitsforduty-relatedaccidentsorillnesses.Memberscontinuetoaccrueservicecreditwhiletheyarereceivingdisabilitybenefitsbutnotwhiletheyarereceivingdisabilityretirementannuities.OnJanuary1followingthefourthanniversaryofthegrantingofthedisabilitybenefit,themonthlybenefitisincreased7percent.Thereafter,thebenefitincreasesby3percenteachJanuary1.
PublicAct94-0539allowsindividualswhohavereceivedTRSdisabilitybenefitsforoneyearormoretoreturntoteachingiftheirmedicalconditionsimprove,allowingpart-timework.
This act allows members on a limited basis to tutor, substitute, or part-time teach for aTRS-coveredemployerwithoutlossofdisabilitybenefitsaslongasthecombinedearningsfromteachinganddisabilitybenefitsdonotexceed100percentof the salary rateuponwhich thebenefitwasbased.
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DeathBenefitsTherearetwotypesofdeathbenefits:areturnofthemember’saccumulatedcontributionsandsurvivorbenefits.
Thereturnofmembercontributionsincludestheretirementcontributions(6.5percentofsalarythroughJune30,1998and7.5percentafterthatdate),withinterestandthe0.5percentpaidtowardannualincreasesinannuity.Beneficiariesofanannuitantreceivetheaccumulatedcontributionsminustheamountthatthememberhadalreadyreceivedasaretirementannuity.
Survivorbenefitscanbepaidineitheralump-sumoramonthlypayment.Alump-sumbenefitistheonlymethodpayabletonondependentbeneficiaries.Adependentbeneficiarymaychooseeitheralump-sumbenefitoramonthlypayment.Survivorbenefitrecipientswhoarebeneficiariesofaretiredmemberareeligibleforanannual3percentincreaseeffectiveJanuary1followingthegrantingofthesurvivorbenefit.Survivorbenefitrecipientswhoarebeneficiariesofanactiveoreligibleinactivememberareeligibleforanannual3percentincreaseonJanuary1followingthefirstanniversaryoftheirreceivingthesurvivorbenefit.
Employment-RelatedFelonyConvictionAnymemberconvictedofafelonyrelatedtoorinconnectionwithteachingisnoteligibleforTRSbenefits;however,themembermayreceivearefundofcontributions.
ContinuityofCreditwithinIllinoisTRSisoneof13publicretirementsystemsthatareincludedintheprovisionsoftheIllinoisRetirement Systems’ ReciprocalAct.This act ensures continuous pension credit for publicemploymentinIllinois.
ConflictsConditionsinvolvingaclaimforbenefitsmayrequirefurtherclarification.Ifconflictsarisebetweenmaterialinthissummaryandthatofthelaw,thelawtakesprecedence.
ource of riches. Diligence is the basis of wealth, and thrift the s o u r c e o f riches. Dili-gence is the basis of weath and thrift the
Diligenceisthebasisofwealth,andthriftthesourceofriches.
~ChineseProverb
f
1250 hancOcKQuIncY, MaSSachuSettS
STATISTICAL
StatIStIcalPage 102
* Member contributions increased from 9.0 percent to 9.4 percent beginning in FY 2006 and from 8.0 percent to 9.0 percent in FY 1999. Also included are member contributions for purchases of optional service, early retirement, and upgrades to the 2.2 formula.** Employer contributions include contributions from federal funds, for early retirement, and for the 2.2 formula.
changes in net assets, last 10 fiscal Years($ in thousands) 2006 2005 2004 2003 additions Membercontributions* $799,034 $761,790 $768,661 $732,020 StateofIllinois 534,305 906,749 1,031,478 929,710 PensionObligationBondproceeds - - 4,330,374 - Employercontributions** 123,543 148,813 127,573 91,552 InvestmentIncome(netofexpenses) 3,993,290 3,330,040 4,485,730 1,060,853 total additions to Plan net assets $5,450,172 $5,147,392 $10,743,816 $2,814,135
deductions Benefitpayments $2,877,231 $2,533,103 $2,262,329 $1,998,622 Refunds 57,967 59,396 48,020 43,115 Administrativeexpenses 15,303 14,404 13,561 13,859 Otherexpenses - - - - total deductions from Plan net assets $2,950,501 $2,606,903 $2,323,910 $2,055,596
changes in net assets Beginningofyear $34,085,218 $31,544,729 $23,124,823 $22,366,284 Netincrease(decrease) 2,499,671 2,540,489 8,419,906 758,539 Endofyear 36,584,889 34,085,218 31,544,729 23,124,823
Benefit and refund deductions from net assets by type, last 10 fiscal Years($ in thousands) 2006 2005 2004 2003 type of BenefitRetirees $2,741,164 $2,407,652 $2,145,187 $1,890,512 Survivors 112,902 103,991 97,155 88,997 Disabilitybenefits 23,165 21,460 19,987 19,113 total Benefits $2,877,231 $2,533,103 $2,262,329 $1,998,622
total refunds $57,967 $59,396 $48,020 $43,115
StatIStIcalPage 103
2002 2001 2000 1999 1998 1997
$681,152 $643,563 $619,623 $866,376 $441,016 $416,739814,740 724,008 639,299 572,951 466,948 385,130
- - - - - -92,618 97,618 91,298 63,645 35,985 36,049
(723,987) (1,015,256) 2,336,217 2,089,661 2,873,103 2,643,775$864,523 $449,933 $3,686,437 $3,592,633 $3,817,052 $3,481,693
$1,759,749 $1,566,793 $1,402,246 $1,284,127 $1,209,957 $1,160,91738,756 35,849 28,797 25,859 24,372 21,72613,487 12,641 11,681 10,680 9,761 9,4691,892 417 10 145 182 400
$1,813,884 $1,615,700 $1,442,734 $1,320,811 $1,244,272 $1,192,512
$23,315,645 $24,481,412 $22,237,709 $19,965,887 $17,393,107 $15,103,926(949,361) (1,165,767) 2,243,703 2,271,822 2,572,780 2,289,181
22,366,284 23,315,645 24,481,412 22,237,709 19,965,887 17,393,107
2002 2001 2000 1999 1998 1997
$1,660,998 $1,475,490 $1,317,841 $1,205,865 $1,138,530 $1,096,60180,461 74,631 68,798 63,586 57,996 51,97518,290 16,672 15,607 14,676 13,431 12,341
$1,759,749 $1,566,793 $1,402,246 $1,284,127 $1,209,957 $1,160,917
$38,756 $35,849 $28,797 $25,859 $24,372 $21,726
101 SOuth SecOnd StreetSan fancIScO, calIfOrnIa
StatIStIcalPage 105
employee and employer contribution rates,last 10 fiscal Years
employer rate (%)2
School districts School districts fiscal employee for 2.2 from federal
Year rate (%)1 State3 formula4 Sources5 total6
1997 8.0% 7.71% - 0.35% 8.06%1998 8.0 8.75 - 0.34 9.091999 9.0 10.20 0.30% 0.33 10.832000 9.0 10.77 0.58 0.31 11.662001 9.0 11.47 0.58 0.32 12.372002 9.0 12.16 0.38 0.35 12.892003 9.0 13.01 0.18 0.35 13.552004 9.0 13.98 0.58 0.40 14.962005 9.0 11.76 0.58 0.49 12.84
2006 9.4 6.75 0.58 0.31 7.64
Member rate increase in FY99 was for the 2.2 formula change; rate increase in FY06 was for the Early Retirement Option.Employer contributions exclude contributions for Early Retirement Option.State contributions increased through FY04 pursuant to statutory ramp schedule under 40 ILCS 5/16‑158 (b‑3). FY05 decline is due to calculation required under pension obligation bond (POB) legislation. FY06 decline is due to specific dollar appropriation specified in Public Act 94‑0004 that is not based on the statutory ramp schedule. Also, POB proceeds that were received in FY04 are not state contributions and are not included in this schedule.Employer contributions for the 2.2 formula change were 0.3 percent of pay in FY99 and 0.58 percent of pay thereafter, with waivers for certain employers under collective bargaining agreements. From Janu‑ary 1, 2002 through June 30, 2003, 40 ILCS 5/16‑158 (e) allowed 0.4 percent of the 2.2 contribution to be diverted to cover a new employer contribution for retiree health insurance.Federal contributions above are expressed as percentages of total active member payroll. Through FY05, employers contributed 10.5 percent of pay as the employer contribution for members paid from federal sources. Beginning in FY06, the employer contribution rate paid on behalf of members paid from federal sources is the same as the employer contribution rate paid by the State of Illinois on behalf of members not paid from federal sources (7.06 percent in FY06, with increases according to the statutory schedule under 40 ILCS 5/16‑158 (b‑3)).Totals shown are rates certified by the actuaries and may not total due to rounding. Also, the total rate shown in FY02 is lower than the total contribution requirement certified by the actuaries because the diver‑sion of the health insurance contributions that began in the middle of the year was not anticipated.
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StatIStIcalPage 106
Benefit recipients by type as of June 30, 2006 type of Monthly Benefit Monthly number of age disability nonoccupational Occupational Survivor Benefit range recipients (all) retirement retirement disability disability Monthly Benefits
Under$500 6,870 5,066 13 3 - 1,788
$500-$999 8,388 5,645 152 3 - 2,588
$1,000-$1,499 8,141 6,032 283 38 - 1,788
$1,500-$1,999 7,674 6,405 118 87 - 1,064
$2,000-$2,499 7,293 6,544 66 70 3 610
$2,500-$2,999 7,374 7,033 42 27 1 271
$3,000-$3,499 7,810 7,621 46 14 - 129
$3,500-$3,999 7,595 7,545 19 2 - 29
$4,000-$4,499 6,537 6,489 25 1 1 21
$4,500-$4,999 4,692 4,667 11 1 - 13
$5,000-$5,499 3,816 3,798 7 - - 11
$5,500-$5,999 2,866 2,861 1 - 1 3
$6,000-$6,499 2,236 2,235 - - - 1
$6,500-$6,999 1,458 1,458 - - - -
$7,000-$7,499 950 949 - - - 1
$7,500-$7,999 543 540 1 - - 2
$8,000ormore 860 859 - - - 1
total benefit recipients 85,103 75,747 784 246 6 8,320
SummaryStatistics,AllBenefitRecipients,asofJune30,2006 age disability Survivor retirement Benefits (3 types) BenefitsAveragemonthlybenefit $3,173 $1,807 $1,127Averageage 69 58 76Averageyearsofservice 29 18 NA
demographics of Benefit recipients and active Members as of June 30, 2006(excludes inactive members) retirees disability Benefit recipients Survivors Male female total Male female total Male female total Under20 - - - - - - 29 42 71 20-24 - - - - - - 15 11 26 25-29 - - - - 5 5 1 - 1 30-34 - - - 2 8 10 4 7 11 35-39 - - - 4 30 34 6 5 11 40-44 - - - 9 27 36 9 16 25 45-49 - - - 8 56 64 22 33 55 50-54 69 156 225 31 148 179 51 121 172 55-59 5,006 8,284 13,290 64 270 334 124 293 417 60-64 6,928 11,012 17,940 36 118 154 208 436 644 65-69 5,069 8,382 13,451 8 54 62 224 620 844 70-74 4,190 6,060 10,250 16 52 68 289 775 1,064 75-79 3,188 5,229 8,417 11 30 41 388 1,080 1,468 80-84 1,927 3,861 5,788 3 27 30 460 966 1,426 85-89 730 2,982 3,712 2 13 15 325 845 1,170 90+ 336 2,338 2,674 - 4 4 261 654 915 total 27,443 48,304 75,747 194 842 1,036 2,416 5,904 8,320
StatIStIcalPage 107
Subtypes of age retirement Benefits regular 2.2 graduated actuarial erO erI age retirement flat formula formula Benefit Style (2.2 & grad. form.) (State or trS) Other total
569 2,314 2,161 7 8 7 5,066
476 3,134 1,789 92 126 28 5,645
564 3,013 1,223 771 410 51 6,032
641 2,545 728 1,617 815 59 6,405
742 2,085 389 2,034 1,248 46 6,544
1,045 1,598 149 2,574 1,611 56 7,033
1,390 1,475 107 2,959 1,614 76 7,621
1,452 1,334 96 2,994 1,550 119 7,545
1,484 1,090 52 2,642 1,091 130 6,489
1,049 888 39 1,853 750 88 4,667
895 688 22 1,464 652 77 3,798
626 491 27 1,175 469 73 2,861
536 405 12 925 301 56 2,235
368 271 6 598 162 53 1,458
244 181 6 380 109 29 949
171 103 3 189 50 24 540
259 207 5 257 92 39 859
12,511 21,822 6,814 22,531 11,058 1,011 75,747
Percentage of age retirement Benefits by Subtype
17% 29% 9% 29% 15% 1% 100%
Percent distribution of total retirees, disabilitants, retirees, disabilitants, active Members Survivors, and active Members Survivors, and active Members Male female total Male female total Male female total
- - - 29 42 71 41% 59% 100% 1,774 6,774 8,548 1,789 6,785 8,574 21 79 100 5,553 18,585 24,138 5,554 18,590 24,144 23 77 100 5,512 15,198 20,710 5,518 15,213 20,731 27 73 100 5,129 14,024 19,153 5,139 14,059 19,198 27 73 100 4,405 13,873 18,278 4,423 13,916 18,339 24 76 100 3,812 15,204 19,016 3,842 15,293 19,135 20 80 100 5,337 19,578 24,915 5,488 20,003 25,491 22 78 100 4,166 14,293 18,459 9,360 23,140 32,500 29 71 100 1,233 3,428 4,661 8,405 14,994 23,399 36 64 100 380 653 1,033 5,681 9,709 15,390 37 63 100 103 152 255 4,598 7,039 11,637 40 60 100 35 49 84 3,622 6,388 10,010 36 64 100 5 12 17 2,395 4,866 7,261 33 67 100 2 3 5 1,059 3,843 4,902 22 78 100
- - - 597 2,996 3,593 17 83 100 37,446 121,826 159,272 67,499 176,876 244,375 28% 72% 100%
StatIStIcalPage 108
average Benefit Payments, last 10 fiscal YearsYears of Service
retirement effective dates under 5 5-9 10-14 15-19 20-24Period July 1, 2005 through June 30, 2006
Averagemonthlybenefit $210 $515 $1,139 $1,744 $2,509Averagefinalaveragesalary $55,558 $36,036 $44,715 $53,349 $62,206Numberofretiredmembers 114 202 202 199 376
Period July 1, 2004 through June 30, 2005 Averagemonthlybenefit $228 $544 $1,074 $1,715 $2,475Averagefinalaveragesalary $59,538 $39,038 $44,000 $52,488 $61,882Numberofretiredmembers 170 198 233 251 567
Period July 1, 2003 through June 30, 2004 Averagemonthlybenefit $208 $575 $1,052 $1,635 $2,359Averagefinalaveragesalary* – – – – –Numberofretiredmembers 106 152 182 181 419
Period July 1, 2002 through June 30, 2003 Averagemonthlybenefit $206 $522 $960 $1,573 $2,350Averagefinalaveragesalary* – – – – –Numberofretiredmembers 213 191 197 191 395
Period July 1, 2001 through June 30, 2002 Averagemonthlybenefit $198 $509 $898 $1,486 $2,140Averagefinalaveragesalary* – – – – –Numberofretiredmembers 156 183 169 174 397
Period July 1, 2000 through June 30, 2001 Averagemonthlybenefit $191 $468 $910 $1,398 $2,057Averagefinalaveragesalary* – – – – –Numberofretiredmembers 191 175 163 170 396
Period July 1, 1999 through June 30, 2000 Averagemonthlybenefit $210 $448 $795 $1,390 $1,915Averagefinalaveragesalary* – – – – –Numberofretiredmembers 194 159 144 138 347
Period July 1, 1998 through June 30, 1999 Averagemonthlybenefit $235 $526 $766 $1,331 $1,780Averagefinalaveragesalary* – – – – –Numberofretiredmembers 157 160 120 121 309
Period July 1, 1997 through June 30, 1998 Averagemonthlybenefit $172 $418 $607 $1,037 $1,452Averagefinalaveragesalary* – – – – –Numberofretiredmembers 130 117 99 60 149
Period July 1, 1996 through June 30, 1997 Averagemonthlybenefit $164 $371 $618 $895 $1,424Averagefinalaveragesalary* – – – – –Numberofretiredmembers 84 132 83 71 141
* The average for the final average salary by years of service are not available for periods before July 1, 2004.
StatIStIcalPage 109
average age average ServiceYears of Service all fiscal for all fiscal for all fiscal
25-29 30-34 35-39 40+ Year retirees Year retirees Year retiresage 59 28 years
$3,372 $4,728 $5,161 $5,600 $3,789$68,902 $77,920 $82,558 $85,399 $70,764
404 1,205 1,005 84 3,791
age 58 30 years$3,467 $4,700 $5,264 $5,270 $4,070
$70,637 $76,980 $84,774 $81,371 $73,078737 2,992 1,637 123 6,908
age 58 30 years$3,227 $4,546 $5,056 $5,206 $3,892
– – – – $70,359510 1,988 1,184 95 4,817
age 58 29 years$3,147 $4,281 $4,628 $4,598 $3,534
– – – – $62,728508 1,995 1,144 81 4,915
age 59 29 years$3,080 $4,301 $4,543 $4,700 $3,512
– – – – $61,714481 2,117 831 74 4,582
age 59 28 years$2,857 $4,113 $4,436 $4,198 $3,250
– – – – $58,144442 1,677 762 67 4,043
age 59 28 years$2,767 $3,850 $4,236 $3,991 $3,053
– – – – $55,634404 1,348 751 71 3,556
age 60` 27 years$2,680 $3,627 $4,090 $3,842 $2,772
– – – – $52,277395 737 623 60 2,682
age 60 23 years$2,260 $2,965 $3,797 $4,041 $2,012
– – – – $42,595131 141 249 47 1,123
age 61 24 years$1,938 $2,844 $3,696 $3,795 $1,960
– – – – $40,977134 104 260 45 1,054
StatIStIcalPage 110
Year ended June 30, 2006 Year ended June 30, 1997 covered Percentage covered Percentage employees of total employees of total (including trS (including trSParticipating employer city rank subs) Membership rank subs) MembershipSchoolDistrictU46 Elgin 1 3,024 1.9% 1(tie) 2,475 1.8%IndianPrairieCUSD#204 Naperville 2 2,561 1.6 7 1,359 1.0RockfordSchoolDistrict#205 Rockford 3 2,280 1.4 1(tie) 2,475 1.8PlainfieldSchoolDistrict#202 Plainfield 4 2,095 1.3 - - -NapervilleCUSD#203 Naperville 5 1,714 1.1 5 1,524 1.1PeoriaSchoolDistrict#150 Peoria 6 1,569 1.0 4 1,571 1.2SpringfieldSchoolDistrict#186 Springfield 7 1,428 0.9 3 1,605 1.2SchaumburgCCSD#54 Schaumberg 8 1,418 0.9 6 1,469 1.1ValleyViewCUSD#365 Romeoville 9 1,414 0.9 - - -CommunityUSD#300 Carpentersville 10 1,406 0.9 - - -CommunityUSD#200 Wheaton - - - 8 1,289 0.9DecaturSchoolDistrict#61 Decatur - - - 9 1,227 0.9TownshipHighSchoolDistrict#214 ArlingtonHeights - - - 10 1,174 0.8
total, largest 10 employers 18,909 11.9% 16,168 11.8%all other (1,022 employers in 2006; 1,061 employers in 1997)* 140,363 88.1% 120,436 88.2%
total (1,032 employers in 2006; 1,071 employers in 1997) 159,272 100.0% 136,604 100.0%
Principal Participating employers
* For the year ended June 30, 2006, “all other” consisted of :
type number of employers total covered employeesLocalschooldistricts 861 132,450Specialdistricts 137 7,243Stateagencies 24 670
total 1,022 140,363
In MemoriamMarjorie Cashin Shea
1922-2005
The Teachers’ Retirement System and staff honor the memory of Marjorie Cashin Shea, a member of the TRS Board of Trustees from 1988 to 1992.
Mrs. Shea was a retired teacher who taught in the public schools of central Illinois for 28 years. While serving on the board, she focused on improving state pension funding. Mrs. Shea worked tirelessly with the Illinois Retired Teachers Association and devoted special attention to the benefits of TRS’s oldest annuitants.
The board and staff extend sympathy to her husband Lawrence and their children.